VSI beat expectations with 4QFY20 core PATAMI of RM58m (3QFY20: -RM15m; YoY: -4%), which brought FY20 sum to RM121m (-32.1% YoY). This surpassed expectations making up 120% of ours and 129% of consensus’. The impressive showing was attributable to superior margin recorded. Raised FY21-22 earnings by 18% and 11%, respectively. Reaffirm BUY recommendation with higher TP of RM2.70 pegged to PE multiple to 17x to CY22 EPS. We view the premium PE multiple is justifiable taking into account of VSI’s multi-year growth trajectory from existing customers coupled with the proven capability to secure more projects that yield higher margins in the near future.

Surpassing expectations. VSI’s 4QFY20 revenue of RM882.6m, translated into core PATAMI of RM57.9m (3QFY20: -RM15.2m; YoY: -4%), which brought FY20 sum to RM121m (-32.1% YoY). This made up 120% of our full year forecast and 129% of consensus’. The strong performance was attributable to better utilisation rate coupled with superior margin. Note that the FY20 core PATAMI sum has been arrived after adjusting for (1) net forex gain of RM327k; (2) gain on disposal of PPE of RM1.5m; and (3) impairment of PPE of RM7m .

Dividend. Declared second interim dividend of 0.8 sen/share (ex-date 14 Oct 2020) and final dividend of 0.8 sen/share subject to shareholders’ approval (4QFY19: 0.8 sen/share). YTD DPS amounted to 2.6 sen/share vs. FY19’s 4.4 sen/share.

QoQ. Top line rebounded by 74.5% to RM882.6m due to the better utilization of plants and low base effect following the resumption of operations from the MCO induced shutdown as recorded in the last quarter. As plants are operating at optimal capacity (vs. suboptimal operation during MCO in Mar and Apr), Malaysia and China contributions jumped by 84.8% and 21.9% respectively. In tandem with that, core PATAMI of RM57.9m (3QFY20: -RM15.2m) was recorded on the back of margin improvement leveraging on ramping up of capacity.

YoY. Revenue decreased by -14.3%, stemming from lower contributions from Malaysia (-24.7%) and Indonesia (-23.1%). China operations however showed a slight uptick in revenue by 2.3%. Save for impairments, China recorded positive PBT of RM1.8m vs -RM27.3m in 4QFY19 on the back of lower operating expenses with the adaptation of asset-light business strategy. Subsequently, core PATAMI moderated by -4%.

FY20. FY20 top line skidded by -18.4% due to above-mentioned reasons. Cumulatively, bottom line was lowered by -32.1% following the recorded loss of - RM15.2 in 3QFY20 due to the Malaysia’s plant closure during the MCO.

Outlook. Turnaround signs for VSI have become visible in 4QFY20 with highest EBITDA margin recorded (10.8%) in the past 3 years. After experiencing a decline in the last quarter, operation has bounced back with positive growth recorded. We are positive on the production recovery and opine this will persist moving forward as Victory is in urgent delivery of the cordless electrostatic sprayers due to the dire demand with exponential increase in active cases of Covid-19 globally. Barring any unforeseen circumstances, a steady recovery is anticipated, on account of active negotiations with 5 prospective customers that we understand are in the final stages of discussion. Case in point, assuming RM600m contract secured (similar to Victory’s size) with full contribution in FY22, a conservative core margin of 5.8% would lift up our FY22 earnings projection by 15% and 22 sen increase to our TP.

Forecast. With the upbeat results, we raise our FY21-22 earnings forecast by 18% and 11%, respectively on the basis of better margin projections. We introduce our FY23 numbers.

Reaffirm BUY, TP: RM2.70 as we roll forward our valuation to mid CY22 and pegged to unchanged PE of 17x. We view the premium PE multiple is justifiable taking into account of VSI’s multi-year growth trajectory from existing customers coupled with the proven capability to secure more projects that yield higher margins in the near future.

Source: Hong Leong Investment Bank Research - 29 Sept 2020