UOB Kay Hian says worst is over for electronic manufacturing services, keeps ‘overweight’ call on sector

KUALA LUMPUR (July 5): The worst is over for the electronic manufacturing services (EMS) sector, said UOB Kay Hian in a recent note.

Besides margin improvement from higher operational efficiency, the research house saw an additional boost that could lift the sector which it attributed to a higher degree of vertical integration, wider market reach, technological advancement, and new prospects from trade diversion.

In a note on Friday, UOB Kay Hian sees the sector gaining further traction even after the recent V-shaped earnings recovery. It has maintained an “overweight” call on the sector.

The research house increased VS Industry Bhd’s (KL:VS) FY2025-2026 earnings estimates by 7%-12%, to account for “higher loadings” from its new venture into the Philippines. It has kept its “buy” call on the stock but raised its target price to RM1.56, from RM1.40 previously, based on rollover price-earnings (PE) of 21 times for 2025.  

“Management believes that the new venture has a favourable risk-reward ratio, considering: a) its experience in supporting key customers’ sub-operations, b) favourable export tariffs from the Philippines to the US, c) higher utilisation hence, and d) more job tender wins,” said UOB Kay Hian, adding that the management is aware of execution risks in a different market.

UOB Kay Hian also highlighted that VS Industry is being approached by new multinational corporation (MNC) customers. The research house also believes that any prospective contracts could give the company better margins, based on recent customer acquisition trends.

“Assuming that a RM500 million contract is secured with full contribution in FY2025 on a net margin of 5.5%, the earnings accretion would be 9%,” said UOB Kay Hian.

However, it is not assuming any new customer wins for now.

At 3.49pm, VS Industry’s share price stood at RM1.29, up one sen from the previous close, valuing the company at RM4.97 billion.

As for SKP Resources Bhd (KL:SKPRES), UOB Kay Hian also raised its FY2025-2026 earnings estimates by 4%-10%, taking into account higher loadings from both its key and new customers.

The research house upgraded SKP Resources to a “buy”, with a higher TP of RM1.36, from RM1.10 previously, based on rollover PE of 15 times for 2025.

“The group has finally charted year-on-year (y-o-y) growth again in 4QFY2024, underpinned by its major customer’s inventory replenishment post correction which has lasted for five consecutive quarters.

“On a positive note, management shared that the key customer has been on a ramp-up mode. We do not discount the possibility of higher volume loadings for its household products given the year-end seasonality. In terms of new prospects, the group remains hopeful of seizing its third new trade-diversion related opportunity which could fill up its ample capacity,” said UOB Kay Hian.

At the time of writing, SKP Resources shares gained 2.48% to RM1.24, putting its market capitalisation at RM1.94 billion.

UOB Kay Hian also has “buy” calls on NationGate Holdings Bhd (KL:NATGATE) and Cape EMS Bhd (KL:CEB), with target prices of RM2.15 and RM1.33 respectively.

It noted that NationGate is spearheading growth through new customer acquisition and new business collaborations — through joint ventures — which could require new premises to house these trade diversion-related opportunities.

The research house also highlighted that NationGate has officially been appointed the approved original equipment manufacturer for the world’s leader in artificial intelligence (AI) computing.

“While the earnings contribution from this segment is still meagre thus far, the door-opening opportunity provides a new platform for the group to ride on the booming AI demand and trade diversion opportunities,” it said.

Meanwhile, Cape EMS is eyeing at least three new prospects, said UOB Kay Hian, which it opines could translate into meaningful earnings contribution for the second half of 2024.

“These products are related to LED lighting, EV charging stations, renewable energy devices, IoT control modules (US-based MNC leading in communication standards) and other segments,” it said.

Cape EMS has an order book of RM200.1 million as at end-April 2024.

NationGate’s share price rose 1% to RM2, valuing the company at RM4.17 billion, while Cape EMS shed 1.6% to 92 sen, bringing it a market capitalisation of RM927 million.

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