MARC Ratings has assigned a preliminary rating of AA_IS(cg) to funding vehicle VS Capital Management Sdn Bhd’s Islamic Medium-Term Notes (IMTN) programme of up to RM1.0 billion. The rating outlook is stable. The rating reflects the credit strength of VS Industry Berhad (VSI) on the basis of an unconditional and irrevocable corporate guarantee it will provide on the IMTN programme.

The rating reflects VSI’s well established operating track record and strong market position in the electronics manufacturing services (EMS) industry as well as its healthy balance sheet structure, characterised by low-to-moderate leverage and strong liquidity position.

VSI currently operates 13 plants with a focus on household electronic products; these plants are located on a combined built-up space of about 3.2 million sq ft, of which around 2.1 million sq ft is in Senai, Johor Bahru. Its steadily built operational track record since 1982 has underpinned its growing market position, ranking 26th globally by revenue in 2021 from 31st in 2016, according to the Manufacturing Market Insider. It is also the sixth largest player in the ASEAN region. The group’s ability to adjust its production scale to adhere to timelines and accommodate increased orders has contributed to its growth. 

Client concentration poses some risk to VSI given its top four clients accounted for about two-thirds of revenue for financial year ended July 31, 2021 (FY2021), given the relative ease for clients to be able to switch manufacturers. To mitigate this risk, the group has undertaken initiatives to strengthen its relationships with key clients and at the same time has aimed to broaden its clientele. VSI’s operating margin is in a single digit, which is typical in the EMS industry. Nonetheless, VSI’s margin, which ranged from 5.0% to 8.4% during FY2016-FY2021, was higher than many of its peers. In regard to raw material, any cost increases are being addressed through its contracts under which price escalations are passed through to the clients. We also note that VSI’s recent recruitment of a large number of foreign workers from Myanmar would substantially alleviate its labour shortage issue.

VSI recorded revenue of about RM4.0 billion for FY2018 onwards save for FY2020 when it was impacted by pandemic-induced closures of its plants. For 9MFY2022, revenue stood at RM2.9 billion (9MFY2021: RM3.1 billion). We note inventory build-up was increased to six months from three months previously to manage supply chain issues. The cost for inventory build-up has led to negative free cash flow (FCF) of RM313.0 million in 9MFY2022 which is expected to return to positive for full year FY2022.

For FY2022, CFO is estimated at about RM200 million, supportive of its capex requirement of about RM150 million p.a. Its cash balance of RM250.0 million and unutilised credit facilities of about RM80 million provide strong liquidity relative to its financial obligations. Group borrowings of RM562.8 million as at 9MFY2022 translated to a gross debt-to-equity (DE) ratio of 0.25x and net DE ratio of 0.14x.

Farhan Darham, +603-2717 2945/ farhan@marc.com.my  

Lim Wooi Loon, +603-2717 2943/ wooiloon@marc.com.my 

Cyndy Goh, +603-2717 2941/ cyndy@marc.com.my