KUALA LUMPUR: Hong Leong Investment Bank (HLIB Research) has lowered its earnings forecast for VS Industry Bhd for the financial year 2024 (FY24–FY25), cutting it by 17 per cent to 12 per cent in order to account for decreased revenue and handle margin issues.
In the first quarter of FY 2024 (1QFY24), VS Industry recorded a revenue of RM1.1 billion, marking a 1 per cent quarter-on-quarter (QoQ) decrease and an 11 per cent year-on-year (YoY) decline.
It resulted in a core profit after tax and minority interests (PATAMI) of RM40.1 million, reflecting a 25 per cent QoQ reduction and a 38 per cent YoY decrease.
HLIB Research noted the figure fell short of both their projections and street estimates, accounting for only 17 per cent of the full-year forecast.
The decline in revenue by 11 per cent was driven by reduced sales in Malaysia, Indonesia, and China, outweighing the positive impact of an increase in sales in Singapore.
"Losses in China remained constant at RM2.8 million due to a challenging operating environment characterised by the absence of substantial orders, which proved insufficient to cover fixed costs," it said in a note today.
The research firm supported by the bank noted that the decrease in profitability was a result of shrinking margins due to the suboptimal utilisation of its manufacturing facilities.
"Margin would still be challenged, especially from the increased labour costs and utilities coupled with the underutilisation of facilities from cooling demand for consumer electronic products.
"Customers will remain cautious in placing orders with the uncertainty of the macroeconomic outlook and the sustained environment of high interest rates.
"The tough economic environment continues to put a strain on operational expenditures with an increase in labour, utilities, and financing costs," it added.
HLIB Research indicated that a positive shift is anticipated as new models are introduced, in consideration of the fact that many brand owners postponed their product launches this year due to inflationary pressures and weakened consumer sentiment.
"Moving forward, we reckon that margin would still be challenged, especially from the increased labour costs and utilities coupled with the underutilisation of facilities with cooling demand for consumer electronic products," it said.
HLIB Research maintains its 'hold' call on VS Industry with a lower target price of 82 sen from 99 sen previously.