MARC Ratings has affirmed its AAIS(cg) rating on VS Capital Management Sdn Bhd’s Islamic Medium-Term Notes programme of up to RM1.0 billion, with a stable outlook. The rating reflects the credit strength of parent company VS Industry Berhad (VSI), which provides an unconditional and irrevocable guarantee on the programme.
VSI’s established track record, strong cash flow generation, and solid balance sheet remain key rating drivers. These strengths are moderated by its very low operating margins — reflecting recent changes in customer cost-sharing arrangements and product reengineering — as well as exposure to customer concentration risk.
VSI manufactures and assembles a broad range of electronics and household appliances for reputable international manufacturers. While the strong credit profiles of its customers mitigate counterparty risk, the group remains exposed to customer concentration risk, with its top four customers accounting for about 86% of revenue in the first nine months of financial year ended July 2026 (9MFY2026). The group is mitigating this exposure through ongoing customer diversification, including the recent onboarding of a new client in the robotic pool cleaner segment.
The group’s inherently low operating margins in the electronics manufacturing services business have been further compressed by tariff cost-sharing arrangements with customers amid uncertainty over 2025 tariff hikes, as VSI prioritised order volume stability from key customers. Margins were also impacted by a key customer’s product redesign following patent expiry, which simplified operations and reduced higher-margin activities previously undertaken by VSI. In addition, start-up costs associated with its Philippines operations further weighed on operating profitability. VSI commenced operations at its Philippines plant in mid-2025 to manufacture two models of hair care and home appliances.
For 9MFY2026, revenue declined 9.5% y-o-y to RM2.7 billion, driven by weaker customer orders amid soft global demand and subdued consumer sentiment. Initial start-up costs for the Philippines operations further weighed on earnings, resulting in pre-tax loss of RM14.6 million. As at end-9MFY2026, the Philippines operations recorded revenue of RM207.7 million and pre-tax loss of RM16.4 million. Nevertheless, progress towards breakeven remains on track, with monthly revenue reaching about USD9 million (approximately RM36.5 million) in February 2026, close to the USD10 million target.
The group is expected to record losses in FY2026, weighed down by start-up costs in the Philippines and a one-off impairment on idle assets. Earnings are projected to recover in FY2027, underpinned by stronger order flows and the rollout of a third appliance model in July 2026, with the Philippines operations expected to contribute around RM600.0 million in revenue. Despite weaker profitability, liquidity and balance sheet strength remain robust, supported by cash flow from operations of RM320.3 million and cash balances of RM706.3 million as at end-9MFY2026. VSI remains in a net cash position, with total borrowings declining to RM511.5 million. The group plans to partially refinance up to RM150 million of the upcoming RM300 million sukuk maturity in September 2027 and pare down the remainder, further reducing leverage to about 0.18x. Its strong financial position provides sufficient headroom to weather near-term challenges.