Despite the near-term hiccup, we gather that outlook remains robust with demand looking up especially from Customer X, US Customer and pool cleaner customer. Management expects the operations to recover in the coming quarters following permission to operate at full capacity and possible border opening for foreign labour. Prospect remains healthy with several discussions taking place with new customers to contribute positively to future earnings. VSI has secured 3 parcels of adjacent land for future capacity expansion in preparation of possible job wins. Reaffirm BUY rating with lower TP of RM1.78 (from RM1.88) pegged to 20x of CY22 EPS.

Recap. VSI’s 1QFY22 core PATAMI of RM35.4m (QoQ: -43.3%; YoY: -47.3%) missed expectations at 10%/11% of our and consensus full year forecasts, respectively. We gather that the major drag came from the lower PCBA orders impacted by component shortage.

Customer Y. The new 300k sqft facility (secured in Oct 2020) at i-Park Senai Airport City has commenced operations and we expect the utilization to pick up steadily. We gather that full utilization for the dedicated facility could garner RM1.5bn in revenue from Customer Y. The revenue guidance looks healthy at RM300-400m for FY22 and RM800m for FY23. We reckon that this could be one of the biggest revenue contributors once the production starts to ramp-up fully.

Customer X and US customer. Strong outlook from Customer X with order diversion from another contract manufacture following the recent labour issue. management expects to start production for the diverted 4 models in 3QFY22. With the availability of floor space following Victory’s exit, potentially there could be additional RM1bn revenue from the conversion of space. As for US Customer, VSI is currently running the production for 8 models and is expected to reach RM1.1bn revenue in FY22. Note that the margin contribution from US Customer is higher than Customer X. Furthermore, we understand that US Customer is the only one that is shielded from the component shortage as it mostly requires mechanical components.

Pool cleaner and Customer K. The trajectory for pool cleaner is still tilted on the sunnier side, with revenue contribution to exceed RM400m in FY22. To recap, VSI secured two additional factories early this year in anticipation of robust demand from this customer. We gather that the additional space could garner RM600-800m in sales. Note that pool cleaner contributes the highest margin. Customer K projection is expected to remain unchanged at this current level.

Further recovery ahead. We gather that management expects the operations to recover in the coming quarters following the permission to operate at full capacity. Note that Aug and early Sept 2021, it was still impacted by the operational restrictions in Phase 2/3. The order outlook remains strong with several discussions taking place with main and new customers to contribute positively to future earnings. To cater to the robust outlook, VSI has secured 3 parcels of adjacent land for future capacity expansion (increase in 20% of land area). The group is ramping up effort in hiring local workers to tackle the foreign labour shortage. Should government announce to allow the entry of foreign worker next year, we opine that VSI would be able to mitigate this shortage based on the quota allocated.

Forecast. We trim FY22/23 forecasts by -7%/-3% respectively after factoring in lower top line and margin challenges in the near-term.

Reiterate BUY, with lower TP of RM1.78 (from RM1.88) based on 20x PE, pegged 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 a prime beneficiary from the intensifying trade diversion theme.

Source: Hong Leong Investment Bank Research - 20 Dec 2021