VSI’s FY21 core PATAMI of RM269.7m (+121.8% YoY) exceeded our and consensus expectations at 106% and 108%, respectively. The exceptional results were achieved despite workforce constraints and various production halts due to Phase 1/EMCO restrictions. EBITDA margin improved +3.2ppt YoY leveraging on better product mix with diversified customers. Reaffirm BUY recommendation with unchanged TP of RM1.77 pegged to PE multiple of 20x of 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.

Beat expectations. VSI’s 4QFY21 revenue of RM941.1m translated into core PATAMI of RM62.5m (QoQ: -14.1%; YoY: +6.8%), which brought FY21’s sum to RM269.7m (+121.8% YoY). This beat expectations at 106% and 108% of our and consensus full year forecasts, respectively. The outperformance was attributable to higher-than-expected EBITDA margin. FY21 one-off adjustments include net forex gain (-RM4.6m), gain of disposal of PPE (-RM1.8m), impairment loss on PPE (+RM5.8m) and impairment loss on investment in associates (+RM25.0m).

Dividend. Declared fourth interim dividend of 0.5 sen/share (ex-date on 14 Oct 2021) and final dividend of 0.5 sen/share subject to shareholders’ approval. YTD DPS amounted to 4.2 sen vs. FY20’s 2.6 sen.

QoQ. Top line eased -12.4% to RM941.1m due to lower utilisation of its Malaysia’s capacity amidst Phase 1 and EMCO restrictions. Note that Malaysia operations were fully halted for 10 days (9 July-22 July) during the implementation of EMCO. Subsequently, bottom line was dragged by -14.1% to RM62.5m.

YoY. Revenue increased by +6.6% attributable to growth in Malaysia (+22.4%) and Indonesia (+62.8%). However, China remained lacklustre with sales decline of -53.3% on the back of capacity under-utilisation in the absence of large order and challenging operating environment. In turn, core PATAMI staged a +6.8% increment.

YTD. FY21 revenue leaped by +23.4% to RM4.0bn. The surge in sales from existing customers coupled with improvement in EBITDA margin (+3.2ppt) arising from favourable product mix has led to impressive +121.8% jump in core PATAMI.

Outlook. With the lifting of the 60% workforce cap after successful vaccination exercise by the group, we strongly believe that VSI is poised for a multi-year growth in earnings from the healthy pipeline of job orders. We foresee better earnings in the coming quarters from the ramp-up of their utilization rate and robust demand. The improvement in margin is worth highlighting thanks to the group’s proactive effort in diversifying into higher-margin products. We understand that the new 300k sqft facility for Customer Y (newly secured in Oct 2020) at i-Park Senai Airport City are on track for completion in the near future after facing some delays as construction works were stalled. Also, the group just recently commenced box-build production for Customer Y.

Forecast. Keep forecast unchanged pending analyst briefing slated on 28 Sept 2021.

Reaffirm BUY, with unchanged TP of RM1.77 pegged to 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 - 27 Sept 2021