MARC Ratings has affirmed its rating of AA_IS(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. 

The rating 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. Despite efforts through automation to help reduce its dependence on foreign workers, VSI remains vulnerable to the vagaries of the labour market and the government’s cross-border policies.   

VSI is a vertically integrated contract manufacturer and was ranked 27th globally and sixth in ASEAN by revenue in 2022. VSI has a high customer concentration risk, as its top-three customers contributed to more than 57% of revenue in FYE July 31, 2022 (FY2022). Concentration risk is, however, mitigated by the high reputation of these major international customers and VSI’s long-term relationships with them ranging from 10 to 22 years. Notwithstanding these, there are certain safeguards in customer contracts providing some protection against financial loss from unexpected termination of contracts.

Group revenue rose 18.2% y-o-y to RM3.4 billion in 9MFY2023, aided by increased orders from key customers and full resumption of manufacturing operations on resolution of labour issues. Pre-tax profit, however, 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 in line with fiscal 2022 of around RM200 million. Consistent with other EMS players, VSI generates mid-single digit operating margins, averaging 5.7% over the last five years. Its contracts with customers, nevertheless, allow for the 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. MARC Ratings notes the negative CFO and free cash flow in FY2022 were due to the high inventory built up to manage supply chain issues, and the capex incurred to acquire a land parcel and hostel accommodation. For fiscal 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 for the next three years; these are expected to be funded through internally generated funds. VSI’s capex plan includes RM6.0 million for the acquisition of 43,500 sq ft of land 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. 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. 

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

Yazmin Abdul Aziz, +603-2717 2948/ yazmin@marc.com.my