Despite the near term hiccup, we left the briefing feeling optimistic about its long term outlook. Main growth catalysts will be from US Customer and pool cleaner. Note that pool cleaner contributed the highest margin among others. On Customer Y, the production of the first model has been delayed to Aug 2021. The group is in the midst of expanding its existing capacity to cater for the robust growth from pool cleaner customer. Revenue contribution from Customer X is expected to sustain throughout FY21 from the existing contracts. Despite the dwindling forecast on Victory, we reckon this would be offset by the increasing orders from others. Reaffirm BUY rating with higher TP of RM1.77 (from RM1.72) pegged to 20x of CY22 EPS.

Recap. VSI’s 3QFY21 core PATAMI of RM72.8m (QoQ: +8.2%; 3QFY20: -RM15.2m), brought 9MFY21’s sum to RM207.2m (3x YoY). This beat expectations at 87%/88% of our and consensus full year forecasts, respectively.

Growth catalyst from US Customer and pool cleaner. Note that Malaysia revenue increased by 11% QoQ despite being the seasonally weaker quarter. We gather that this was partially thanks to the higher contribution from US Customer as more models started to roll out. VSI is currently running the production for 6 models (additional of 1 model in the quarter) and is expected to roll out the remaining 2 models in Aug and Sept, respectively. This will contribute RM900m to VSI’s FY21 top line (vs RM150m in FY20) and c.RM1.2bn for FY22. Note that the margin contribution from US Customer is higher than the Customer X’s. The sunnier outlook from pool cleaner leads to FY22 forecast to increase to RM400m (from c.RM350m in FY21). Additionally, the group recently secured a new factory to cater for the robust growth from this customer. Note that pool cleaner contributes the highest margin vs others.

Customer Y. The new 300k sqft facility (secured in Oct 2020) at i-Park Senai Airport City is facing some completion delays as FMCO restrictions stalled construction works. The production of the first model for Customer Y will commence in Aug 2021 (from earlier guidance of June 2021) and is expected to contribute RM300m 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 X. The revenue contribution is expected to sustain throughout FY21 and FY22 from the existing contracts. Additionally, the improvement in group’s margin is worth highlighting thanks to the proactive effort in diversifying its product portfolio. We understand that VSI has managed to reduce their reliance on Customer X by clinching more wins from other customers. To note, Customer X percentage contribution has been on a declining trend from 64%/43% in FY19/FY20 to 33% in the latest 3QFY21 quarter.

Customer K. Management anticipates moderate growth on the back of re-opening of the US economy. Regardless, projection is still in an upward trajectory with RM800m for FY22.

Victory. To recap, Victory was one of the recent wins in Aug 2020 to manufacture and supply cordless electrostatic sprayers to sanitize and disinfect large areas. However, with the more optimistic view of the recovery, management shared that the production has been put on hold. Despite the dwindling contribution from Victory, we reckon this would be offset by the increasing orders from others.

Still more opportunity in the horizon. Despite operating at full capacity, we are upbeat that the business development team is still continuing their discussions on boarding new customers. Although still at early stage of discussions, these should serve as growth catalysts over the longer term.

Forecast. We increase our FY21/22/23 forecast by 8%/5%/4% respectively after factoring in margin expansion for the group.

Reiterate BUY, with higher TP of RM1.77 (from RM1.72) based on 20x PE, 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 prime beneficiary from the intensifying trade diversion catalyst.

Source: Hong Leong Investment Bank Research - 18 Jun 2021