VSI has entered into a SPCA with Ipark Development Sdn Bhd, to acquire six pieces of land with industrial buildings (~400k sqft) in Senai for a total consideration of RM98.8m. Additionally, the management also shared that they have successfully secured another Customer Y with production scheduled to start in June 2021. At this juncture, no margin guidance is given but management shared that a full utilization of 300k sqft plant would potentially garner RM1bn revenue for the group. We raise our forecast for FY22-23 by 9% and 7% respectively premised on higher capacity expansion. Reaffirm BUY with higher TP of RM2.92 pegged to unchanged PE of 17x to CY22 EPS.

NEWSBREAK

VSI has on 28 August 2020 and 14 Oct 2020, entered into a Sales and Purchase and Construction Agreement (SPCA) with Ipark Development Sdn Bhd, a subsidiary of AME Elite Consortium Bhd to acquire six pieces of land with industrial buildings (413,682 sqft) in Senai for a total consideration of RM98.8m. Additionally, the management also shared that they have successfully secured another customer benefiting from the trade diversion.

HLIB’s VIEW

Fair land pricing. The acquisition price works out to be RM200+ psf, which we deemed as fair for freehold industrial space at iPark, Senai Johor. From our channel check, the latest listing (12 Oct 2020) on iProperty detached factory is selling for RM280 psf. This acquisition will be funded via internally generated funds and bank borrowings but the proportion has yet to be determined. The price constitutes the building construction and amenities.

Positive on the news. The rationale for the acquisition is in line with the group’s objective of capacity expansion for new customers. This expansion is crucial to drive future growth as their previous 160k and 180k sqft capacities are already running near full capacity on the back of a US customer new ramping up order. As highlighted by management, the land expansion is scheduled to be completed by 2QCY21 and commence operations for a new customer in the same period. Positively, the acquired land is located at a close proximity of its existing manufacturing facilities. Management shared that 300k sqft of the acquired new land will be allocated for new Customer Y and the remaining 100k sqft are set for VSI new office and R&D facilities.

New Customer Y secured. VSI has yet again proved their capability with this new win of Customer Y for the manufacturing of home appliances. Notably, this is another customer that VSI managed to secure from the trade diversion as Customer Y’s key supplier is located in China. Management shared that the orders could be as big as the existing US customer (FY23 guided to be RM1.4bn for US customer), but this is however premised on VSI’s performance and delivery at the early stage of manufacturing. At this juncture, only one new model has been secured with molding to start once the blueprint is acquired from the customer. The new model is scheduled to start production in June 2021 and a total of RM150m capex (RM100m for land and building, RM50m for buying of machinery) has been set aside for this new customer. At this juncture, no margin guidance is given but management shared that a full utilization of 300k sqft plant would potentially garner RM1bn revenue for the group.

Outlook. The capex for FY21 is guided to be RM200m, including the RM150m allocated for Customer Y. At this juncture, management shared that they are slowing down on talks with 4 other customers as they are expected to be fully occupied after the commencement of production for the new Customer Y. However, should the other potential customers be willing to give time for VSI to build new factories, the group are open to expand further. Additionally, management shared their concern on hiring workers but we are assured that they could mitigate this by aggressively hiring local workers and getting in foreign workers from nearby factories that have been closed. Furthermore, we understand that Customer X are tendering for their new product in Dec 2020 and VSI are expected to participate in it.

Forecast. With this positive development, we raise our FY22-23 earnings forecast by 9% and 7%, respectively on the basis of higher capacity expansion.

Reaffirm BUY with higher TP of RM2.92 pegged to unchanged PE of 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. As the biggest EMS player in Malaysia with solid track record, we opine that VSI is on the trajectory to achieve newhigh order value amongst the intensifying trade diversion.

Source: Hong Leong Investment Bank Research - 15 Oct 2020