VSI chalked in its highest quarterly core PATAMI of RM67.2m, making up 28% of ours and 29% of consensus’ full year forecasts. We deem this to be within expectations due to seasonal strength with order ramp from Customer K following Christmas and holiday seasons. The splendid showing was attributable to superior margin recorded and better sales mix. Reaffirm BUY recommendation with unchanged TP of RM2.92 pegged to PE multiple to 17x to CY22 EPS. We like VSI for its multi-year growth trajectory from existing customers coupled with the proven capability to secure more projects that yield higher margins in the near future.

Within expectations. VSI’s 1QFY21 revenue of RM987.1m translated into highest ever quarterly core PATAMI of RM67.2m (QoQ: +16%; YoY: +35%). This made up 28% of our full year forecast and 29% of consensus’. We deem this to be in line as 1Q is a seasonally stronger quarter for the group with ramp up order from Customer K following Christmas and holiday seasons. Save for an unprecedented FY20 due to plant shut down following the MCO, 1Q historically made up 26% of the group full year in FY17-19. The strong performance was attributable to better product mix coupled with superior margin. Note that 1QFY21 core PATAMI sum has been arrived after adjusting for (i) net forex loss of RM467k; and (ii) loss on disposal of PPE of RM63k.

Dividend. Declared first interim dividend of 1.2 sen/share; ex-date 17 Feb 2021 (1QFY20: 1.0 sen/share).

QoQ. Growth in top line continued, with 12% increase to RM987.1m due to better sales in Malaysia (+31%) and Indonesia (+37%) operations. China however, continued to drag with sales decline of -47% on the back of under-utilisation of capacity, absence of large order and challenging operating environment in China. Encouragingly, the group charted the highest core PATAMI of RM67.2m (+16%) on the back of EBITDA margin improvement +0.8ppt leveraging on better product mix with diversified customers.

YoY. Revenue skidded by -5% due to lower contributions across all boards in Malaysia (-1%); Indonesia (-3%) and China (-43%). Despite the top line lull, core PATAMI showed an impressive showing with 35% improvement due to abovementioned reasons.

Outlook. VSI charted an encouraging start with yet another highest EBITDA margin recorded (11.6%) in the past 3 years. We are positive on the production recovery and opine this will persist moving forward as Victory (customer secured in Aug 2020) is in urgent delivery of the cordless electrostatic sprayers due to the dire demand on the back of exponential increase in Covid-19 active cases globally. Recall that with the new Customer Y secured in Oct 2020, we reckon that this could be one of the biggest revenue contributors once the production starts to ramp-up fully. We are positive on the group’s strategy in mitigating the risk and diversifying its customer base while subsequently proving its capability as trusted EMS player.

Forecast. Unchanged.

Reiterate BUY, TP: RM2.92 pegged to unchanged PE of 17x to CY22 EPS. We like VSI due to its 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 new-high order value amongst the intensifying trade diversion.

Source: Hong Leong Investment Bank Research - 18 Dec 2020