Investment Highlights

• Maintain BUY on V.S. Industry (VSI) with an unchanged fair value of RM2.75/share, pegged to an FY22F PE of 18x pending updates from an analyst conference call later today.
• VSI’s 1QFY21 core profit was within expectations at RM67mil, excluding RM0.5mil net one-off loss from forex losses and loss on disposal of PPE. The results accounted for 29% of our and consensus’ full-year estimates. However, we consider the results to be in line due to seasonality of its coffeemaker customer’s orders which are typically stronger in 4Q and 1Q.
• YoY: VSI’s 1QFY21 revenue decreased by 5% on lower contribution from China due to an absence of large orders. However, core profit rose 35% due a more favourable sales product mix in Malaysia, where the group saw higher orders from its coffeemaker customer on stronger demand relating to at-home consumption amid Covid-19 as well as due to contribution from its US-based customer which began production in September 2020 (only seeing contribution after 1QFY20). Meanwhile, its Indonesia segment PBT shrank 53% due to a 3% decline in sales orders and absence of economies of scale at its facilities.
• QoQ: 1QFY21 core profit rose marginally by 0.2% as: (i) revenue climbed 12% on higher contribution from Malaysia due to its US-based customer and stronger revenue from Indonesia; (ii) the absence of impairment of RM2.6mil receivables incurred in the previous quarter for Indonesia; (iii) narrower losses from its China operations; and (iv) stripping off RM0.5mil exceptional loss vs. stripping off 4QFY20’s exceptional loss of RM13mil from impairment losses on PPE.
• Outlook: Amid the challenging operating environment due to Covid-19 uncertainties, the group will focus on fulfilling its customers’ orders after securing new customers Victory and Customer Y in August 2020 and October 2020 respectively on top of a ramp-up for its US-based customer after clinching additional models for production with a total of nine models in production by end-CY2021.
• To cater for the increase in orders, VSI recently announced its purchase of six pieces of land with industrial buildings with a total size of RM414K sq ft in i-Park @ Senai Airport City, Johor.
• We continue to like VSI due to its: (i) strong order growth supported by its key customers’ product launches; (ii) its ability to offer turnkey EMS solutions as a vertically integrated player; and (iii) its efforts to diversify its customer base with opportunities secured from the US-China trade war diversion.

Source: AmInvest Research - 18 Dec 2020