VSI’s 9MFY21 core PATAMI of RM207.2m (3x YoY) exceeded our and consensus expectations. The strong performance was thanks to better-than-expected top line and EBITDA margin improvement. Despite seasonal weakness, VSI recorded quarterly core PATAMI improvement of +8.2% QoQ attributable to higher sales orders from existing customers. EBITDA margin improved +5.0ppt YoY leveraging on better product mix with diversified customers. Reaffirm BUY recommendation with TP of RM1.72 pegged to unchanged 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.

Breaking above. VSI’s 3QFY21 revenue of RM1.1bn translated into core PATAMI of RM72.8m (QoQ: +8.2%; 3QFY20: -RM15.2m), which brought 9MFY21’s sum to RM207.2m (3x YoY). This beat expectations at 87%/88% of ours and consensus full year forecasts, respectively. The outperformance was attributable to better-than expected top line and EBITDA margin improvement. 9MFY21 one-off adjustments include net forex loss of RM2.0m and loss on disposal of PPE of RM1.3m.

Dividend. Declared third interim dividend of 0.8sen/share (3QFY20: none); ex-date on 9 July 2021. YTD DPS amounted to 3.2sen/share vs 9MFY20’s 1sen/share.

QoQ. Top line increased by 7.6% to RM1.1bn contributed by improvement in Malaysia (+11.0%) that compensated the declines in Indonesia (-9.5%) and China (-17.0%). Despite seasonal weakness, bottom line recorded the highest ever core PATAMI of RM72.8m (+8.2%) attributable to better top line and EBITDA margin (+1ppt) improvement. Note that this exceptional expansion was achieved despite the 7-day temporary production halt in Feb due to positive Covid-19 cases.

YoY. Revenue recovered strongly >100% attributable to growth in Malaysia (2.6x) and Indonesia (+69.3%). However, China continued to drag with sales decline of -43.2% on the back of under-utilisation of capacity, absence of large order and challenging operating environment. Note that 3QFY20 was badly hit by plant underutilization in Malaysia during MCO1.0. Core PATAMI registered an impressive rebound of RM72.8m vs -RM15.2m in SPLY.

YTD. 9MFY21 revenue leaped by +29.7% to RM3.1bn. The surge in sales coupled with improvement in EBITDA margin (+5.0ppt) arising from favourable product mix has led to record core PATAMI after leaping 3-fold to RM207.2m.

Outlook. We remain positive on VSI’s long term prospects brought by the steady demand of consumer electronic products from homebound populations. We reckon earnings outlook to be in expansionary supported by increasing sales orders from main customers. The improvement in margin is worth highlighting thanks to the group’s proactive effort in diversifying its product portfolio. We gather that the new 300k sqft facility for Customer Y (newly secured in Oct 2020) at i-Park Senai Airport City is facing some delays in completion on the back of stalled construction works with FMCO restrictions. However, we reckon that this could be one of the biggest revenue contributors once the production starts to ramp-up fully.

Forecast. Keep forecast unchanged pending analyst briefing slated on 17 June 2021.

Reiterate BUY, with TP of RM1.72 pegged to unchanged 20x of 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 prime beneficiary from the intensifying trade diversion catalyst.

Source: Hong Leong Investment Bank Research - 16 Jun 2021