VSI’s 1QFY22 core PATAMI of RM35.4m (QoQ: -43.3%; YoY: -47.3%) were below our and consensus expectations. The quarter saw operational difficulties stemming from component shortage and lower operational efficiency for the new factory. Despite the near term hiccup, we are optimistic on the group’s robust demand from its customers. We expect the utilization for the new 300k sqft facility at i-Park Senai to pick up steadily. Additionally, VSI has also secured 3 parcels of adjacent land for future capacity expansion to support the optimistic order outlook. Reiterate BUY recommendation with unchanged TP of RM1.88 pegged to PE multiple to 20x to CY22 EPS.

Missed expectations. VSI’s 1QFY22 revenue of RM968.0m translated into core PATAMI of RM35.4m (QoQ: -43.3%; YoY: -47.3%). This is below expectations at 10%/11% of our and consensus full year, respectively. The shortfall was on the back of margin compression due to shortage in component supply and lower operational efficiency. Note that 1QFY22 core PATAMI sum has been arrived after adjusting for (i) net forex gain of -RM3.3m; and (ii) gain on disposal of PPE of -RM718k.

Dividend. Declared first interim dividend of 0.4 sen/share; ex-date 17 Feb 2022 (1QFY21: 1.2 sen/share).

QoQ. Top line inched up +2.9% to RM968.0m thanks to better sales in Malaysia (+4.6%) despite the drag in China (-13.9%) and Indonesia (-2.3%). China continued to disappoint on the back of under-utilisation of capacity, absence of large order and challenging operating environment. Despite the top line increase, bottom line registered a -43.3% decline to RM35.4m attributable to EBIT margin compression -0.6ppt due to reasons mentioned below.

YoY. Revenue skidded by -1.9% due to lower contributions from Malaysia (-2.2%) and China (-24.3%) that offset the rise in Indonesia (+16.1%). Encouragingly, Indonesia operations recorded 4x improvement in PBT to RM2.1m (1QFY21: RM508k) in tandem with the better sales. Core PATAMI on the other hand chalked in -47.3% decline due to -3.2ppt weakness in EBITDA margin attributable to (i) higher labour and raw materials costs; (ii) higher depreciation from new facilities; (iii) cost incurred for Industrial Vaccination Centre (PPVIN) under PIKAS and; (iv) lower operational efficiency from the newly commenced production for Customer Y.

Outlook. The confluence of factors brought by the Covid-19 pandemic with the disruption in global supply chain has resulted in component shortage, scarce supply in global logistics and elevated costs. The group is ramping up effort in hiring local workers to tackle the foreign labour shortage. On a brighter note, the order outlook remains strong with several discussions taking place with the main customer and new customers to contribute positively to future earnings. The new 300k sqft facility (secured in Oct 2020) at i-Park Senai Airport City have commenced operations fully and we expect the utilization to pick up steadily. Additionally, to cater to the robust outlook, VSI has also secured 3 parcels of adjacent land for future capacity expansion as the group’s existing capacities are fully utilized.

Forecast. We updated our model for FY21 audited accounts and introduce FY24 forecasts. We keep our existing number of FY22 /FY23 intact pending analyst briefing slated tomorrow but cite possible downside bias.

Reiterate BUY, TP: RM1.88 pegged to unchanged PE of 20x to CY22 EPS. We like VSI 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 - 17 Dec 2021