VS: Margins Under Pressure Amid Softening Demand and Tariff Costs

A leading investment bank has highlighted persistent margin pressure on a major electronics manufacturing services (EMS) provider, citing challenges from reciprocal tariff costs and a softer global economy. Despite ongoing efforts to manage costs and diversify, the bank has maintained a Neutral rating on the company, revising down its earnings forecast for FY26F.

Performance Review

The company is navigating a period of margin compression as it endeavors to sustain customer relationships. This involves absorbing a portion of reciprocal tariff costs, particularly with Malaysia’s tariff rate now fixed at 19%. While this clarity is expected to gradually improve order flow visibility, the high concentration of US customers suggests that earnings recovery may be protracted, especially against the backdrop of a softer US economy. Consequently, the investment bank has trimmed its FY26F earnings forecast by approximately 15%, adjusting its margin assumption below 3% to reflect a slower recovery trajectory.

Key Customer Dynamics

Customer contributions are crucial, with one major client projected to contribute about RM1.3bn in FY26F revenue from secured product models, primarily beauty-care and floor-care products. Operations in Malaysia and the Philippines are expected to account for 62% and 38% of this contribution, respectively. Revenue growth is anticipated from various customers, with a US-based customer and an Indonesia customer contributing significantly. However, revenue from discretionary products, such as pool-cleaning items, is expected to decline by around 30% year-on-year due to softer consumer sentiment in the US.

Future Outlook and Mitigation Efforts

Despite the headwinds, order flows showed improvement in 1QFY26, with several new models entering mass production. The finalisation of Malaysia’s 19% reciprocal tariff rate provides greater clarity, which is expected to stabilise order flows in upcoming quarters. Encouragingly, the company has also onboarded several new customers, with production slated to commence by end-2025, potentially adding RM300m in annual revenue. These new engagements span diverse product segments and avoid overlap with existing clientele. To counter the challenging environment, the company remains focused on lean production, operational efficiency, and disciplined cost control to facilitate profitability normalisation.

Investment Bank’s View

In light of the persistent margin pressure and a projected slow and gradual earnings recovery, the investment bank has reiterated its Neutral recommendation for the company.