MARC Ratings has affirmed its rating of AAIS(CG) on special purpose 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 parent VS Industry Berhad (VSI) which has provided an unconditional and irrevocable guarantee on the IMTN programme. Total outstanding under the IMTN programme stood at RM500.0 million as at end-June 2024.
VSI’s established track record and strong competitive position in the electronics manufacturing services (EMS) industry, healthy cash flow generation and strong balance sheet remain key drivers to the rating. These strengths are moderated by VSI’s low operating margins, inherent in the EMS business, and its exposure to customer concentration risk.
VSI is one of the few vertically integrated contract manufacturers in the region, ranking third in the ASEAN region and 30th globally in 2023, by revenue. The rating agency notes that VSI has a portfolio of reputable international manufacturers of electronics and household appliances. While this mitigates counterparty risk, the group remains exposed to customer concentration risk as is evident by the 77% revenue contribution from its top four customers for the first nine months of financial year ended in July 2024 (9MFY2024). MARC Ratings draws comfort from VSI’s long-term customer relationships, ranging from 10 to 23 years, that mitigate termination risk. This view is also supported by VSI’s proven ability to adhere to stringent manufacturing requirements, provide feedback consultations and readily adapt to changes in product specifications. Notwithstanding this, some safeguards in the contracts alleviate financial loss from sudden termination.
For 9MFY2024, group revenue declined by 11.0% y-o-y to RM3.1 billion. This was primarily due to subdued demand in 1HFY2024 as orders declined on rising inflation and interest rate concerns in the US. For full year 2024, the rating agency expects VSI’s revenue to decline around 10% y-o-y to around RM4.2 billion. Consistent with the operating profile of the EMS industry, VSI generates mid-single digit operating margins, recording 5.20% in 9MFY2024. Margin pressures are somewhat alleviated by terms in some contracts that allow for pass-through of raw material price increases. MARC Ratings understands that the group has continued to broaden its customer base, with a new client onboarded in 4QFY2023. The contract from this client for a new business segment has a higher margin.
Operating profit would also benefit from orders that were previously outsourced but are now being undertaken in-house. Cash flow from operations was healthy at RM231.1 million while free cash flow was positive at RM47.4 million on lower capex. Its strong liquidity position would provide headroom to undertake capex without taking on new substantial borrowings. Its capex over the next three years is expected to remain moderate at an average of RM68 million p.a. Group borrowings stood at RM851.7 million as at end-9MFY2024 (FY2022: RM600.1 million). MARC Ratings views positively VSI’s adherence to a low-to-moderate leverage position as reflected by debt-to-equity (DE) and net DE ratios of 0.36x and 0.07x as at end-April 2024.