VSI’s 1HFY22 core PATAMI of RM75.8m (-43.6% YTD) missed expectations forming 24%/28% of ours and consensus’ full year forecasts. The quarter recorded improvement QoQ from higher revenue, improvement in capacity utilisation and absence of one-off vaccines related costs. Despite that, the group continued to face challenges in the component and labour shortage which dragged margin and YoY earnings. We trimmed our FY22 forecast by - 17%. Reaffirm BUY recommendation with lower TP of RM1.45 (from RM1.78) pegged to 18x PE (previously 20x) to CY22 EPS. Following the recent sell down, the stock currently trading at an attractive 10.4x FY23 PE, which is close to - 1.5SD below its 5-year mean.

Below expectations. VSI reported 2QFY22 core PATAMI of RM40.4m (QoQ: +14.0%; YoY: -40.0%) which brought 1HFY22’s sum to RM75.8m (-43.6% YoY). This missed expectations at 24%/28% of ours and consensus’ full year forecasts, respectively. The deviation was on the back of margin compression due to the increase in labour and raw material costs. 1HFY22 one-off adjustments include net forex gain (RM7.4m) and gain on disposal of PPE (RM760k).

Dividend. Declared second interim dividend of 0.4 sen/share (2QFY21: 1.2 sen/share); ex-date on 14 April 2022. YTD DPS amounted to 0.8 sen vs 1HFY21’s 2.4sen.

QoQ. Top line was a tad up by 4.8% to RM1.0bn contributed by the growth in Indonesia (+12.2%) and Malaysia (+4.8%) that more than offset the drag by China (- 25.3%). Bottom line registered bigger expansion by +14.0% in tandem with (i) increased in revenue; (ii) improvement in capacity utilisation with the lifting of 60% workers restrictions; and (iii) the absence of one-off setup cost for the Industrial Vaccination Centre (PPVIN) and the vaccination cost for the workforce.

YoY/YTD. Revenue was fairly unchanged by +1.5% YoY/-0.2% YTD contributed by growth in Malaysia (+5.8% YoY) from increase in sales orders from key customers. Indonesia and China however, registered YoY decline of -15.3% and -46.5%, respectively. China operations remained under-utilised in the absence of large orders. Core PATAMI fell by -40.0% YoY/-43.6% YTD on the back of EBITDA margin compression by -2.6ppt YoY as the group still facing challenges in (i) increase in labour and raw materials costs; (ii) higher depreciation from new facilities; and (iii) sub-optimal mass production for new key customer.

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. In light of labour scarcity, the group is ramping up effort in hiring local workers to tackle the foreign labour shortage. Should the government announce to allow the entry of foreign workers this year, we opine that VSI would be able to cater to the robust order growth from its customers. The group has spent RM30m for the new hostel which could house an additional 1,800 workers. 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 models in 4QFY22. We expect the utilization rate for the 300k sqft facility at i-Park Senai Airport City to pick up steadily in coming quarters.

Forecast. We trim our FY22 forecast by -17% to account for the margin challenges in the near term.

Reiterate BUY, with lower TP of RM1.45 (from RM1.78) based on 18x PE (previously 20x), pegged to CY22 EPS. Following the recent sell down, the stock currently trading at an attractive 10.4x FY23PE, which is close to -1.5SD below its 5-year mean. 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 - 28 Mar 2022