Investment Highlights

• We upgrade V.S. Industry (VSI) to BUY from HOLD, but with a bonus issue adjusted fair value (FV) of RM1.98/share (from RM2.75/share earlier). Recently, VSI completed its 1-for-1 bonus issue and 762mil warrants at an exercise price of RM1.38. Our FV is based on 20x FY23F revised earnings, in line with its historical 1-year average PE. There is no adjustment to our FV based on a 3-star ESG rating as appraised by us (Exhibit 5).

• VSI’s FY21 core net earnings of RM270mil was an all-time high, coming in above our expectation but in line with the consensus’ estimates. The results exceeded our forecasts by 15% largely from better-than-expected margins, thanks to better product sales mix as well as stronger-thanexpected performances from its overseas operations. Hence, we have raise our FY22–23F forecasts by 12–13% to reflect these higher margins.

• QoQ, the company’s 4QFY21 core net earnings of RM63mil dipped by 14%, largely dragged by the lower orders fulfilled as a result of the imposition of full and emergency movement control orders during the quarter, coupled with increased costs which eroded operating margin by 1.3 percentage points to 11%.

• YoY, VSI’s FY21 core net earnings doubled mainly due to higher sales order from existing key customers, more favourable product sales mix in Malaysia, a turnaround in the group’s Indonesian segment, as well as halved losses from its China-based operation.

• Zooming in on its Malaysian operation, FY21 revenue surged by 28% YoY to RM3,475mil, thanks to higher sales orders from key customers. Together with improved margins stemming from the better product sales mix, VSI’s FY21 PBT accelerated by 2.1x YoY to RM329mil.

• VSI’s Indonesia segment recorded a 48% YoY surge in its FY21 revenue to RM350mil, mainly attributed to higher sales orders from a key customer in consumer electronics, which experienced brisk demand following the growing adoption of the work-from-home culture globally. The stronger revenue has turned around the loss-making segment in the previous year to FY21 PBT of RM11mil.

• On the other hand, the China segment posted a 44% YoY contraction in its FY21 revenue to RM161mil, mainly due to underutilised operations in China in the absence of large orders given the highly challenging landscape in the country. On a positive note, FY21’s LBT narrowed by 57% YoY, largely attributed to lower expenses following a series of successful streamlining initiatives.

• We are positive on VSI’s medium to long-term outlook, underpinned by its: (i) strong order growth supported by key customers’ product launches; (ii) ability to offer turnkey electronic manufacturing services solutions as a vertically integrated player; (iii) customer diversification efforts with opportunities arising from the US-China trade war diversion; and (iv) improving overseas operations underpinned by higher sales order from the group’s key Indonesian customer as well as effective costs rationalisation initiatives in China.

Source: AmInvest Research - 27 Sept 2021