VSI’s labour shortage situation is expected to persist for the remainder of FY22. We gather that the recruitment expenses could sum up to c.RM30m which expected to be fully incurred in FY22 and subsequently claimed from customers. The prospect remains intact with several discussions taking place with new customers to contribute positively to future earnings. We opine that once the international borders reopen, the discussions will be more productive with several potential clients already conveying interest to visit the group’s factories. We trim FY22/23 EPS forecasts by -21%/-13% respectively. Maintain BUY with lower TP of RM1.21 (from RM1.45) pegged to 18x of CY22 EPS.

Recap. VSI chalked in 1HFY22 core PATAMI of RM75.8m (-43.6% YoY) which missed expectations at 24%/28% of our and consensus full year forecasts, respectively. The quarter improved QoQ thanks to higher revenue, higher capacity utilisation and absence of one-off vaccine related costs. Despite that, the group continued to face challenges given component and labour shortage which dragged margin and YoY earnings.

Labour shortage. Despite efforts in ramping up hiring of local workers to tackle the labour shortage, the situation is expected to persist for the remainder of the financial year. We understand that, if the recruitment process goes as planned with the 3,700 foreign labour quota allocated, VSI would be able to ramp up their operations by 40%. We gather that the recruitment expenses could sum up to c.RM30m which is expected to be fully incurred in FY22 and subsequently claimed from customers.

Customer Y. Note that its i-Park Senai Airport City facility has started production since Aug 2021. Currently running at suboptimal capacity of 20%, the utilisation is only expected to ramp up once the required labour comes in. The revenue guidance looks healthy at RM300m 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.

Other main customers. Save for the labour shortage, we see encouraging outlook from Customer X with order diversion from another contract manufacture following the recent labour conundrum. Management expects to start production for the diverted four models in 4QFY22. We understand the additional box build contract could garner RM800m revenue. As for US Customer, VSI expects the contribution to amount to RM800m (from RM1bn previously) due to the labour hiccup. 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. Revenue guidance from pool cleaner customer and Customer K remain unchanged.

Outlook. We gather that the operations are currently running at full workforce capacity but still unable to fulfil the total orders demanded from customers. The prospect remains intact with several discussions taking place with new customers to contribute positively to future earnings. We opine that once international borders reopens, the discussions will be more productive with several potential clients already conveying interest to visit the group’s factories.

Forecast. We trim FY22/23 EPS forecasts by -21%/-13%, after baking in lower top line and margin challenges in the near-term. Maintain BUY, with lower TP of RM1.21 (from RM1.45) based on 18x PE, pegged to CY22 EPS. 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 - 31 Mar 2022