PETALING JAYA: VS Industry Bhd’s earnings outlook is likely to remain subdued in the coming years as the company prioritises business continuity over margins amid the impact of US tariffs, says CGS International Research (CGSI Research).
The research house expects the electronics manufacturing services (EMS) provider’s profit margins to stay compressed at around 3% to 4% for its financial years ending July 31, 2026 (FY26), to FY28 as it works to maintain key relationships with its US-based customers.
CGSI Research said certain US customers have requested cost reductions from suppliers to share their tariff burden after the United States finalised its reciprocal tariff rates.
The research house noted that VS Industry’s management chose to accept these cost reductions to protect long-term relationships, describing the move as “prudent”, as rejecting them could risk losing market share to regional competitors.
However, the decision is expected to affect the company’s profitability in the near term.
“We believe the impact on VS Industry’s bottom line will be more pronounced in FY26 and FY27 despite our projected 14% and 8% year-on-year increase in revenue, respectively,” the research house said.
Meanwhile, CGSI Research said VS Industry’s operations in the Philippines, which began production for a major customer in May, are not expected to make a significant near-term contribution as they remain in the ramp-up phase.
“In the Philippines, VS Industry commenced production for customer x, which accounted for about 40% of the group’s FY24 group revenue, on May 25 and is set to volume load a second model come December,” the research house said.
By FY27, CGSI Research said customer X is expected to contribute about 30% additional revenue to VS Industry’s top line versus FY25’s base line.
The research house has reflected this growth in its earnings forecasts but applied a discount to account for potential “teething issues”.
While labour costs in the Philippines are lower than in Malaysia, CGSI Research noted that margin accretion is likely to be offset by higher materials, logistics and auxiliary equipment costs.
“We think margins will only improve meaningfully from the second half of FY26 onwards once VS Industry’s Philippines assembly operations commence independently of support from Malaysia,” it said.
“Nonetheless, the Philippines remains a critical cog in VS Industry’s operations for customer X as its products are predominantly for export to the US market.”
CGSI Research has cut VS Industry’s FY26 to FY28 earnings per share (EPS) forecasts by between 22% and 24%, as costs and startup losses in the Philippines are likely to outweigh the revenue contribution from customer X.
“Having moderated VS Industry’s FY26 to FY27 revenue forecasts in our previous note to reflect management’s guidance, we now cut FY26 to FY28 profit after tax to further account for margin dilution as VS Industry prioritises business continuity with its US customers by sharing their tariff burden.”
Following this revision, the research house also reduced its target price by five sen to 55 sen a share, implying an FY27 price-to-earnings ratio of 14 times – a slight discount to its eight-year mean of 16.5 times, as the “risk-reward is balanced”.
CGSI Research reiterated a “hold” call on the stock.