VSI reported 2QFY20 core PATAMI of RM28.6m (-42.7% QoQ, -16.1% YoY), which brought 1HFY20 sum to RM78.6m (-1.9%). A disappointment as this only made up of 43% and 45% of ours and consensus full-year forecasts, respectively. With this prolonged pandemic, we are expecting that the operations in China would still operate at a low level in the near future. The halted in production in Malaysia for a week now due to MCO would affect their margins due to existing fixed overheads. We downgrade VSI to HOLD with a lower TP of RM0.77, pegged to 8.6x of CY21 EPS.

Below expectations. VSI reported 2QFY20 core PATAMI of RM28.6m (-42.7% QoQ, -16.1% YoY), bringing the 1HFY20 sum to RM78.6m (-1.9%); this only accounts for 43% and 45% of ours and consensus full-year forecasts, respectively. This disappointment was attributed to the lower-than-expected revenue particularly coming from Malaysia operations. Note that 1HFY20 core PATAMI sum has been arrived after adjusting for (i) net forex gain of RM2.7m; and (ii) disposal of PPE of RM322k.

Dividends. None declared for the current financial quarter (2QFY19: 1.0 sen/share).

QoQ. Top line was weaker by 20.7% at RM820.3 due to the lower contribution from all segments. Malaysia segment recorded huge drop in revenue by 25% to RM660.1m on the back of decrease in sales order from key customers. China revenue dipped slightly by 4.9% to RM69.9m due to underutilisation. As a result, core PATAMI plunged by 42.7% to RM28.6m.

YoY. Turnover declined 16.5% dragged by lower contribution from China and lower sales order from key customers. China revenue fell by 33.5% from RM105.2m to RM69.9m following the restructuring and streamlining exercise that affected their overall capacity. In turn, core PATAMI fell 16.1% following the decline in revenue.

YTD. Revenue contracted by 9.9% to RM1.9bn mainly due to the overall decline in revenue from all segments. However, core PATAMI only dipped slightly by 2.4% to RM78.2m cushioned by the narrower loss from their China operations.

Malaysia. Currently, VSI is still waiting for the approval from Ministry of Trade and Industry’s (MITI) after the National Security Council (NSC) included E&E to be in the list of critical products that would allow them to operate during Movement Control Order (MCO) period. The halted in production for over a week now would affect their margins due to existing fixed overheads.

Outlook. In line with the lower than expected 1H20 results, we are expecting an even weaker 2HFY20 due to (i) lower utilisation rates in Malaysia and China with the MCO in effect to curb the Covid-19 pandemic; (ii) supply chain disruption as suppliers in China are catching up on production; and (iii) reduction in order flow from key customers due to weakened global consumer sentiments. We view that the outlook and downtrend of order visibility could be exacerbated in the current climate as consumer income is affected globally by the Covid-19 pandemic.

Forecast. FY20-22 earnings are cut by 25%, 17% and 17%, respectively as we lower revenue projections backed by the reasons above.

Downgrade to HOLD. Post earnings revision, our TP is revised to RM0.77 (from RM1.73) reflecting the cut in earnings forecasts as well as the lowered PE multiple of 8.6x (previously 16x) of CY21 EPS (-1.5SD below its 3-years historical P/E). While the negative ramifications from Covid-19 is a key headwind for VSI, this is balanced by its undemanding valuations.

Source: Hong Leong Investment Bank Research - 27 Mar 2020