• Overview. VS Industry (VSI) registered a substantial improvement in net profit for 1QFY21 of RM66.7m (+38.7% yoy) mainly due to better product sales mix and cost improvement. On qoq basis, net profit jumped by 23.2% owing to improvement in revenue, and better cost management. The higher earning was also aided by greater contribution from other income which rose by 101% qoq. Net profit margin improved to 6.8% versus 6.1% in 4Q20 and 4.8% in 1Q20.
• Key highlights. Management indicated that demand will be stronger with several new products in the production and expected to be launched in 2021 by its clients. The company’s additional two new clients are expected to utilise capacity by 2021, thus VSI is in the midst of increasing its domestic operation’s floor space by 25% to cater to this growing demand. During the quarter, the Malaysian segment contributed 89% out of total revenue while Indonesia and China sales were 7% and 4% respectively.
• Against estimates: Inline. The 3MFY21 net earnings of RM66.7m (+38.7% yoy) made up 29% of consensus full year forecast.
• Dividend. A total DPS of 1.2 sen was declared in 1QFY21 bringing a payout of 35% (vs 1QFY20: 1 sen).
• Outlook. We anticipate the demand for VSI services will be stronger due to its reputation as a reputable EMS player in the global supply chain for home appliances’ segment. With different target markets and geography of clientele, VSI is expected to navigate the risk of having competitors in the same “box build”. This will help to prolong the relationship with their clients. VSI’s capacity expansion is likely to generate economies of scale while catering for diversified clients and product mix. The company continued to command solid fundamentals with net cash position of RM202.0m or 11 sen net cash/ share as at 3MFY21. Currently, VSI is trading at 18.5x FY21 PE. Based on the current industrial sector’s PE of 30x, we believe VSI deserves to trade at a higher valuation, in our view, given its stronger earnings growth potential.

Source: BIMB Securities Research - 18 Dec 2020