As 3QFY20 lasted from Feb-April 2020, the MCO disturbance had fully weighed on the recent results reported. The grey heavy cloud has passed and 4QFY20 is expected to see higher revenue recorded (RM700-800m) coupled with the strong inclination to return back to the black. Despite the soft demand outlook, the group has been shielded for now due to backlogs. VSI yet again proved their capabilities by securing a new automotive customer. Maintain HOLD with an unchanged TP of RM0.94, pegged to 15x of CY21 EPS.

The Following Are Some of the Key Takeaways From VSI’s 3QFY20 Analyst Concall.

Recap. VSI reported 3QFY20 core LATAMI of -RM15.2m (2QFY20: +RM28.6m; 3QFY19: +RM22.3m), which brought 9MFY20 PATAMI to RM63.4m (-38.1% YoY). This only made up 47% of ours and 56% of consensus’ full year forecast.

MCO disturbance. As 3QFY20 lasted from Feb-April 2020, the MCO disturbance had fully weighed on the recent results reported. In March, the impact was largely came from the 2 weeks of MCO and weak demand from China since the lockdown started. April suffered the most with only RM20m of revenue recorded. The group also incurred additional cost of RM1.5m for the adherence in SOPs. The grey heavy cloud has passed and at this juncture, VSI is operating at their optimal capacity. Hence, 4QFY20 results (May-Jul) is expected to see higher revenue recorded (guided to be RM700-800m) coupled with the strong inclination to return back to the black.

Shielded in the near term. The Covid-19 pandemic has caused a slowdown in the global economy. With the bleak outlook, consumers will turn cautious on their discretionary spending. Despite that, the group seems shielded in the near term given order backlogs. Management reiterated that they still receive orders from existing customers with relatively unchanged capacity from May onwards.

Still “D”eclining. Currently, VSI is running 2.5 lines for their UK-based customer (from 3.5 lines) due to the end of product lifecycle in both floor care (1 line) and haircare (1.5 lines). For PCBA and battery pack, the run rate is expected to remain at suboptimal at 60%. Management also shared that the revenue contribution from their UK customer for FY20 will consist of smaller chunk of the pie (<40%). This decline however, will be offset by the increase in contribution from VSI’s other customers.

Customers update. For the US customer, the group expected the contribution to be steady at RM60m per quarter. Note that the margin contribution for the US customer is higher than the UK’s. For the coffee brewer, management forecasted 1QFY21 to record a strong rebound due to the higher demand as customers stock up for Christmas and year-end sales. All in all, the outlook seems positive from this coffee brewer and the contribution for FY20 is expected to exceed FY19’s (c.RM400m). The contribution for the pool cleaner is expected to be higher for FY20 as well, benefitting from the shifting of production away from competitors.

New partnership. VSI has yet again proven their capabilities by securing a new automotive customer. Though the contribution is expected to be minimal at this juncture (<RM50m per year), this has open up more opportunities for the group to leverage their capabilities outside of consumer electronics products. The advanced discussion with 2-3 prospective customers have been put on pause due to restrictions on international travels.

Forecast. Unchanged.

Maintain HOLD with unchanged TP of RM0.94 pegged to a P/E multiple of 15x (in line with regional peers) of CY21 EPS. We remain cautious on turning outright bullish on the stock given the subdued negative economic ramifications from Covid-19

Source: Hong Leong Investment Bank Research - 2 Jul 2020