Bissell production is expected to be delayed significantly due to the MCO. Customer X order will be revised with no indication just yet while Zodiac demand remains intact for now. As for Keurig, the order increment previously is likely a one-off and may be shifted back to Keurig’s other contract manufacturer in China. The halted production in Malaysia for over two weeks now due to MCO would impact bottom line by RM20-30m. Maintain HOLD with an unchanged TP of RM0.77, pegged to 8.6x of CY21 EPS.

We joined VSI’s 2QFY20 analyst con-call yesterday; the following are some of the key takeaways.

Recap. VSI reported 2QFY20 core PATAMI of RM28.6m (-42.7% QoQ, -16.1% YoY) which brought 1HFY20 sum to RM78.6m (-1.9%); a miss as it only accounted for 43% and 45% of ours and consensus full-year forecasts, respectively.

Revenue. The disappointment was attributed to the lower-than-expected revenue coming from their key customer and China operation. Management explained that the reduced sales order from its key customer was due to: (i) the end of product lifecycle for its floor-care product on Dec 2019; and (ii) lower PCBA orders as competitors are building up their PCBA capability.

Bissell. Earlier on, management guided that Bissell top line contribution would amount to RM150m for FY20. For 1HFY20, Bissell has made up RM37m of revenue from the production of Model 1. Initially, it was expected that 2HFY20 revenue will be higher with Model 2 and 3 productions to commence Mar, followed by Model 4 and 5’s to start in May and Dec, respectively. However, due to the production cessation (resulting from MCO), management expect the productions for the last two models to resume only in 2021.

Order flow. At this juncture, management guided that Customer X has indicated that they would need to revise orders but has yet to conclude on the figure. For Zodiac, on the other hand, the RM480m revenue contribution for full year remains intact. Before the MCO, Keurig had been diverting order to VSI due to the lockdown in China. However, with the current situation in Malaysia, the VSI is waiting for further customer updates with the possibility that they might shift it back to the other existing contract manufacturer in China.

China. China has partially resumed its operation following the lockdown that was extended until the mid-Feb 2020. Although workers are returning gradually, we gather that its China operation is still picking up their productivity gradually (currently running at 70% utilisation rate) due to shortage on manpower. With this prolonged pandemic, we expect that the operation in China would remain suboptimal in the near future.

MCO update. To date, VSI has halted its production for over two weeks. VSI has submitted its application to MIDA in order to operate during the MCO period. At this juncture, the resumption of operation seems a bit far-fetched, even that materialises, VSI will have to be running at 50% capacity. With the assumption that their plant will be closed until 14 Apr, management guided that bottom line will be impacted by RM20-30m quartering 3QFY20.

Forecast. Unchanged as the briefing yielded no surprises.

Maintain HOLD with unchanged TP of RM0.77 pegged to a P/E multiple of 8.6x (- 1.5SD below its 3-years historical P/E) of CY21 EPS. While the negative ramification from Covid-19 is a key headwind for VSI, this is balanced by its undemanding valuations upon recovery.

Source: Hong Leong Investment Bank Research - 2 Apr 2020