VSI is expected to experience solid growth ahead on the back of its (i) leadership position as largest Malaysian EMS player; (ii) visible earnings growth; and (iii) stance as a beneficiary of the still ongoing US-China trade war and 2019-nCoV pandemic. VSI has been paying out generous dividend for the past 10 years, with an average payout ratio of 53% and this will be a strong support of any downside risk. We initiate coverage with BUY rating with TP of RM1.73, pegged to 16x PE on CY21 EPS.

Formally established in 1982. VSI is one of the leading integrated Electronics Manufacturing Service (EMS) providers in the region, with proven capabilities to undertake the manufacturing needs of global brand names for office and household electrical and electronic products. VSI has more than 30 years of experience and track record being the Malaysia’s largest home-grown EMS provider. They have successfully shone throughout the years and earned the ranking as one of the world’s top 50 integrated EMS providers and top 5 EMS providers in ASEAN.

EMS market booming. According to the Market Report Gazette, the global EMS market is anticipated to reach a CAGR of roughly +4% over the next five years topping USD55bn in 2026 from USD43.2bn in 2019. Increasing demand for consumer electronic is the major factor in propelling growth of the EMS market further.

Customer X increase in demand. Early of 2019, major customer Customer X has released two new product lines and an update to one of the company’s better known products. The growing demand of Customer X products was also well reflected in their revenue that spiked 28% from GBP3.5bn in FY17 to GBP4.4bn in FY18. With these constant new inventions from Customer X, it could be well said that the demand for the production in consumer electronic manufacturing services are in the rising trend.

Expanding earnings base. We expect growth to come from new and existing customers securing more manufacturing orders, thus raising its earnings growth in the future. In 2018, VSI increased their capacity with additional 340k sqft floor space; 160k sqft for Bissell and 180k sqft that is still vacant. With this new facilities, VSI is ready to receive orders from new customers as this facility is already completed and ready to assemble new production capabilities.

Financials. Moving forward, we are bullish on FY20’s growth on the back of (i) additional new production line; (ii) marginally stronger USD vs RM; and (iii) potential business inflow from China. We forecast VSI’s to achieve 3-year core net profit CAGR of 7% over FY19-FY22f, backed by (i) growth in contract order from Bissell; (ii) high potential of securing new customers benefitting from the still ongoing US-China trade war; (iii) narrowed losses from China due to adoption of an asset-light strategy and lower cost model hence improving its operational flexibility; and (iv) improvement in efficiency in running existing production lines.

Strong track record of dividend payout. VSI has a dividend payout policy of minimum 40% of its net profit as a way to reward investors. However, the company has been paying out generous dividends over the past four years (average payout ratio of 54%). Moving forward we are projecting a DPS of 3.9-4.6 sen for FY20-22 based on a conservative payout of 40%, translating to a dividend yield of 2.8-3.3%.

Initiate coverage on VSI with a BUY recommendation and TP of RM1.73, pegged to 16x of CY21 EPS. This valuation multiple is relatively in line with the 3-years historical mean P/E of 16x (see figure #15) and regional peers average of 15x (see figure #16). We like VSI for its (i) leadership position as largest Malaysian EMS player; (ii) visible earnings growth; and (iii) stance as a beneficiary of the ongoing US-China trade diversion and 2019-nCoV pandemic.

Source: Hong Leong Investment Bank Research - 10 Feb 2020