VS CAPITAL MANAGEMENT SDN BHD - 2023 |
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| Report ID | 60538900469552 | Popularity | 224 views 56 downloads | |||||
| Report Date | Sep 2023 | Product | ||||||
| Company / Issuer | VS Capital Management Sdn Bhd | Sector | Manufacturing - Others | |||||
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| Rationale |
Rating action MARC Ratings has affirmed its rating of AAIS(cg)/Stable on VS Capital Management Sdn Bhd’s Islamic Medium-Term Notes (IMTN) programme of up to RM1.0 billion. VS Capital Management is a wholly-owned funding vehicle of VS Industry Berhad (VSI) which has provided an unconditional and irrevocable guarantee on the IMTN. Rationale The rating primarily reflects VSI’s strong cash flow generation, underpinned by its long operational track record and strong competitive position as one of the largest Electronics Manufacturing Services (EMS) players in the region. These strengths are moderated by VSI’s low operating margins, inherent in the EMS business, and its exposure to customer concentration and labour risks. Its reliance on foreign labour is also a moderating factor, although recent issues pertaining to labour have been largely addressed. VSI is a vertically integrated contract manufacturer and was ranked 27th globally and sixth in ASEAN by revenue in 2022. It has several reputable international clients in the electronics and household appliance segment. Customer concentration risk is reflected by the fact that its top-three customers account for over 57% of revenue for financial year ended July 31, 2022 (FY2022). This risk is mitigated by long-term customer relationships with these clients that range from 10 to 22 years, underlining VSI’s ability to adhere to stringent manufacturing requirements, provide consultation and readily adapt to changes in product specifications. Notwithstanding these, some safeguards in the contracts alleviate financial loss from sudden termination. MARC Ratings also notes the while VSI is reducing its heavy reliance on foreign workforce given its labour- intensive operations, by implementing automation in its production lines to improve cost efficiency and productivity, the group remains vulnerable to the vagaries of the labour market as well as the government’s cross-border policies. Group revenue rose 18.2% y-o-y to RM3.4 billion for 9MFY2023, aided by increased orders from key customers and full resumption of manufacturing operations on the resolution of labour issues. Pre-tax profit declined by 9.6% y-o-y to RM151.2 million, primarily driven by higher operating and financing costs. For full FY2023, pre-tax profit is expected to be around RM200 million as in the previous year. Consistent with the operating profile of the EMS industry, VSI generates mid-single digit operating margins, averaging 5.7% over the last five years. Its contracts with customers, nevertheless, allow for pass-through of raw material price increases, which should help mitigate margin pressures from cost inflation. Cash flow from operations (CFO) was recorded at RM197.0 million in 9MFY2023, returning to pre-pandemic levels. The negative CFO and free cash flow (FCF) in FY2022 were due to high inventory built up to manage supply chain issues and the capex incurred to acquire a land parcel and hostel accommodation. For 2024, CFO is anticipated to be stronger on the back of a more stable operating environment; VSI also expects to add at least one new customer in the near term. Group borrowings rose to RM905.7 million as at end-9MFY2023 from RM600.1 million as at end-FY2022, primarily for expansion purposes, including machinery upgrades. Total capex is expected to be around RM80 million a year over the next three years; these are expected to be funded by internally generated funds. VSI’s capex plans includes RM6.0 million for the acquisition of a land parcel measuring 43,500 sq ft in Senai, Johor; the acquisition — intended for plant capacity — is expected to be completed by end-2023. VSI has maintained a low-to-moderate leverage position. Its debt-to-equity (DE) ratio and net DE ratio stood at 0.37x and 0.13x as of end-April 2023. MARC Ratings expects leverage to hover around these levels over the medium term. Its liquidity and unutilised credit remain very strong relative to its financial obligations. Rating outlook The stable rating outlook reflects MARC Ratings’ expectation that VSI would broadly maintain its credit profile commensurate with the rating band over the next 12-18 months. Rating trajectory Upside scenario A sustained improvement in the company’s financial metrics, including improving contracted sales and a more diversified clientele, and increase in operating margins could lead to a positive rating action. Downside scenario Downward rating pressure could occur if VSI’s performance were to deviate substantially from projections and/or if the group were to undertake aggressive debt-funded acquisitions and expansions that would affect its overall credit metrics. Key strengths
Key risks
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