VSI reported 3QFY20 core LATAMI of -RM15.2m (2QFY20: +RM28.6m; 3QFY19: +RM22.3m), which brought 9MFY20 sum to RM63.4m (-38.1% YoY). This only made up 47% of our full year forecast and 56% of consensus’. The deviation was due to the halted operations from MCO. At this juncture, the production recovery has gradually picked up and VSI is currently operating at full capacity. Cut FY20-22 earnings by 26-31%. Reiterate HOLD recommendation with higher TP of RM0.94 after lifting our PE multiple to 15x, in line with regional peers.

Below expectations. VSI’s 3QFY20 revenue of RM505.7m, translated into a core LATAMI of -RM15.2m (2QFY20: +RM28.6m; 3QFY19: +RM22.3m), which brought 9MFY20 sum to RM61.7m (-38.1% YoY). This only made up 47% of our full year forecast and 56% of consensus’. This underperformance was mainly due to lower revenue as a result of MCO induced shutdown. Note that the 9MFY20 core LATAMI sum has been arrived after adjusting for (i) net forex loss of RM5.2m; and (ii) gain on disposal of PPE of RM843k. No dividends declared for the current financial quarter (3QFY19: 0.8 sen/share). YTD DPS amounted to 1 sen vs. 9MFY19’s 2.8 sen.

QoQ. Top line was weaker by 38.4% at RM505.7 due to the lower contributions from all segments. Malaysia segment recorded a huge drop in revenue by 45.3% to RM361.1m on the back of the temporary closure of factories following the MCO. China revenue dipped slightly by 6.7% to RM65.2m due to underutilization. In turn, core LATAMI of -RM15.2m (2QFY20: +RM28.6m) was recorded on the back of margin deterioration as capacity was idle.

YoY. Revenue dropped by 43.1% stemming from lower contributions from Malaysia (- 51.3%) and China (-29.9%) operations. This was partially cushioned by 11% increase in the revenue from Indonesia. Despite recording higher revenue, Indonesia segment incurred LBT of -RM4.5m from PBT of RM0.3m in the previous year corresponding quarter attributable to less favourable sales mix and RM3m of inventories written off. Core LATAMI was recorded in contrast with RM22.3m core PATAMI in 3QFY19.

YTD. 9MFY20 revenue dipped by -19.7% in tandem with the underutilization of plants during the MCO that lasted for the remaining of 3QFY20. Subsequently, core LATAMI (-38.1% YoY) was recorded due to abovementioned reasons.

Outlook. We opine that VSI’s sales will still be partially impacted in 4QFY20 due to the extension of CMCO from MCO. Although it has been granted the permission to ramp up their production to in the last week of April, we gather that it still took quite a while to return back to optimal utilisation in order to adhere to the strict SOPs. Having said that, the production recovery has gradually picked up and VSI is currently operating at full capacity to make up for the order backlog. Management reiterated that despite the expected shortfall results for the remainder of FY20, VSI long term prospects remain intact. The group remains hopeful that the situation will improve gradually on the back of countries progressively opening up their economies.

Forecast. Given the results shortfall, we cut our FY20-22 earnings forecast by 26%- 31%. The adjustments were made on the basis of lower revenue projection, noting the slow recovery to persist and the broader economic challenges from Covid-19.

Maintain HOLD, TP: RM0.94. With permission granted to operate at full capacity and production now ramped up, we reckon the degree of operational risk has somewhat eased. As such, we revert to our previous valuation yardstick of peers average PE (previously -1.5SD below historical 3-year mean); TP of RM0.94 (from RM0.77) is derived from 15x PE tagged to CY21 EPS. Note that valuation of its peers has also recovered with the broader market rebound (Figure #2). Still, we remain cautious on turning outright bullish on the stock as OEM demand from major brand owners could still be subdued given the negative economic ramifications from Covid-19.

Source: Hong Leong Investment Bank Research - 24 Jun 2020