VSI’s 1HFY21 core PATAMI of RM134.4m (+71.9% YTD), forms 57% of ours and consensus’ full year forecasts. We deem this to be broadly in line as 1H is a seasonally stronger period for the group. Indonesia revenue leaped 54% due to higher PCBA order from a key customer buoyed by healthy end demand following increase in work from home arrangement. EBITDA margin improved +2.8ppt YoY leveraging on better product mix with diversified customers. Proposed second interim dividend of 1.2sen/share which goes ex on 14 Apr. Reaffirm BUY recommendation with higher TP of RM3.44 pegged to higher PE multiple of 20x 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 future.

Within expectations. VSI’s 2QFY21 revenue of RM999.3m translated into core PATAMI of RM67.2m (QoQ: flat; YoY: +137.6%), which brought 1HFY21’s sum to RM134.4m (+71.9% YoY). This made up 57% of ours and consensus’ full year forecasts, respectively. We deem this to be broadly in line as 1H is a seasonally stronger period for the group. 1HFY21 one-off adjustments include net forex loss of RM2.2m and loss on disposal of PPE of RM1.8m.

Dividend. Declared second interim dividend of 1.2 sen/share (2QFY20: none); ex date on 14 April 2021. YTD DPS amounted to 2.4sen/share vs 1HFY20’s 1sen/share.

QoQ. Top line was fairly unchanged at RM999.3m (+1.2%). Indonesia revenue leaped 54% due to higher PCBA orders from a key customer buoyed by healthy end demand following increase in work from home arrangement. This was however partially buffered by the softer contribution from Malaysia (-3.1%) following slower orders from Customer K. Core PATAMI was flat at RM67.2m.

YoY/YTD. Revenue increased by 21.8% YoY/ 7.1% YTD attributable to growth in Malaysia (+28.2% YoY) and Indonesia (+72.8% YoY). China however, continued to drag with sales decline of -36.2% on the back of under-utilisation of capacity, absence of large order and challenging operating environment in China. Core PATAMI saw an impressive showing with growth of >100% YoY/ +71.9% YTD on the back of EBITDA margin improvement (+2.8ppt) leveraging on better product mix with diversified customers.

Outlook. We remain positive on VSI’s long term prospects brought by the steady demand of consumer electronic products from homebound populations. We gather that the new 300k sqft facility for Customer Y (newly secured in Oct 2020) at i-Park Senai Airport City is on track to be completed in the next few months. We reckon that this could be one of the biggest revenue contributors once the production starts to ramp-up fully. Despite operating at full capacity, we are upbeat that the VSI’s business development team is still continuing their discussions on boarding new customers. Although still at early stage of discussions, these should serve as a growth catalyst for the group over the longer term horizon.

Forecast. Unchanged.

Reiterate BUY, with higher TP of RM3.44 (from RM2.92) after lifting our PE multiple from 17x to 20x, pegged to CY22 EPS. We view that the higher premium is justifiable given the (i) healthy order outlook brought by the steady demand of consumer electronic products; and (ii) margin expansion from customer diversification efforts. 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 - 31 Mar 2021