We left the briefing feeling confident about its outlook. VSI has completed the tender with Customer X on beauty care product and the decision is expected to make known in Jan 2021. On Customer Y, the production of the first model will commence by June 2021 and subsequently contribute to FY22 top line. We reckon that this could be one of the biggest revenue contributors once the production starts to ramp-up fully. Despite the dwindling forecast on Victory contribution, we are not overly concern as mass immunisation will take time. Albeit FY21 capacity being fully booked, we are upbeat that VSI is still in discussions to on-board new customers which should serve as a growth catalyst over the longer term horizon. Reaffirm BUY recommendation with unchanged TP of RM2.92 pegged to 17x of CY22 EPS.

Recap. 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. The strong performance was attributable to better product mix coupled with superior margin.

Customer X. Note that Malaysian revenue increased by 31% QoQ. This partially came from the contribution from the motorised items job by Customer X secured in Aug 2020. The revenue contribution is expected to be consistent throughout FY21. Additionally, VSI has completed the tender with Customer X on final assembly of beauty care product and the decision is expected to make known in Jan 2021. Should another win materialize, this would further buttress up their top line for FY22.

US Customer. The production for US Customer is progressing well. VSI successfully signed US Customer’s floor care product in Mar 2019, which was previously manufactured by two China-based EMS. VSI is currently running the production for 3 models and is expected to roll out 2 more models by end of 2020 and the remaining 4 models in 2021. Total of 9 models from US Customer will contribute RM900m to VSI’s FY21 top line (vs RM150m in FY20). Projection is expected to be positive and VSI could potentially secure a total of 12 models with revenue contribution of RM1.3bn for FY22. Note that the margin contribution from US Customer is higher than the customer X’s.

Customer Y. First building of the factory that was announced in Oct 2020 has already been completed at i-Park @ Senai Airport. The production of the first model will commence by June 2021 and contribute to FY22 top line. We reckon that this could be one of the biggest revenue contributors once the production starts to ramp-up fully.

Customer K. The change in consumer behaviour of the homebound population has led to demand spike for coffee machines, on top of strong orders to stock up for Christmas and holiday seasons. Contributions are expected to increase to RM700m in FY21 (vs RM400m in FY20). Similarly, pool cleaner customer is also projecting an upward trend with FY21 contribution to increase by 50% to RM300m from RM200m in FY20. Note that this customer contributed the highest margin among others.

Victory. To recap, Victory is one of the recent win in Aug 2020 to manufacture and supply cordless electrostatic sprayers on box-built basis. Victory Inc.’s products are used by hospitals, hotels, schools, airlines, casinos, public transportation, household and businesses to sanitize and disinfect large areas swiftly and effectively. However, with the gradual rollout of vaccines and more optimistic view of the recovery, management shared that the contribution may be lower than previous guidance of RM300m for FY21. Nevertheless, we opine that the deviation will just be marginally lower, on the premise that rollout of mass immunisation will take time and relevancy of the product will still be intact with more sanitary-conscious population.

Still more opportunity in the horizon. Despite operating at full capacity, we are upbeat that the VSI’s business development team is still continuing their discussions on boarding new customers. While still being at early stage of discussion, this should serve as a growth catalyst for the group over the longer term horizon.

Overseas operations. The group is still conducting an asset light strategy for China operations. The plan on monetizing the land in Zhuhai is still under progress and expected to be concluded in 2021. Indonesia on the other hand, is expected to turn profitable in FY21 with the on boarding of new customer. Note that the red streak recorded in FY20 was due to one customer who filed for bankruptcy.

One positive Covid-19 case. The group announced later in the evening that they have received a confirmation of one local machinery technician that has tested positive for Covid-19. From what we understand the worker has been self-quarantined since 13 Dec and the rest of the contact from the machinery division has received their negative test results. At this juncture, we opine that the situation is still under control as no positive cases were detected among the foreign workers.

ESG. VSI has been included in the FTSE4Good Bursa Malaysia Index since June 2018. On another note, with the heighten scrutiny regarding hostel facilities, we are comforted that VSI’s workers’ accommodation has received the certificate of approval from by Jabatan Tenaga Kerja (JTK) in line with the required standard.

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. Furthermore, 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.

Source: Hong Leong Investment Bank Research - 28 Dec 2020