VSI chalked in 9MFY22 core PATAMI of RM118.9m (-42.6% YoY) which fell behind our/consensus expectations at 57%/59%. The setback was no thanks to the confluence of labour and components shortage. Despite the tough period, the group recorded sequential improvement with QoQ core PATAMI up by +6.9% attributable to favourable product sales mix. We roll forward our valuation year to FY23 (from CY22). Maintain BUY recommendation with TP of RM1.14 pegged to a lower PE multiple of 16x to FY23 EPS. As the biggest EMS player in Malaysia with solid track record, we opine that VSI would be able to weather through the gloomy clouds while simultaneously scour for opportunities form the trade diversion.

Missed expectations. VSI’s 3QFY22 revenue of RM927.6m translated into core PATAMI of RM43.1m (QoQ: +6.9%; YoY: -40.7%), which brought 9MFY22’s sum to RM118.9m (YTD: -42.6%). This came in below expectations at 57%/59% of ours and consensus full year forecasts, respectively. The disappointment was attributable to lower-than-expected top line coupled with EBITDA margin weaknesses due to labour shortage and global supply chain disruptions. 9MFY22 one-off adjustments include net forex gain of -RM14.7m and gain on disposal of PPE of -RM1.5m.

Dividend. Declared third interim dividend of 0.4sen/share (3QFY2: 0.8 sen); ex-date on 8 July 2022. YTD DPS amounted to 1.2sen/share vs 9MFY21’s 3.2 sen/share.

QoQ. Revenue lowered by -8.5% to RM927.6m dragged by the reduction across all regions Malaysia (-7.9%), Indonesia (-5.8%) and China (-52.0%). Despite the top line drag, core PATAMI recorded increase of +6.9% to RM43.1m attributable to favourable product sales mix coupled with improvement in EBITDA margin by 1.9ppt.

YoY/YTD. Top line skidded by -13.7% YoY/ -4.9% YTD weighed down by the reduction in sales across all regions, Malaysia (-12.1% YoY), Indonesia (-11.9%) and China (-69.1%). The disappointment was affected by lower delivery of orders to key customers during the quarter attributable to labour shortage and components shortage from disruption in supply chains. This caused suboptimal operational efficiency in the production. Bottom line fell even more by -40.7% YoY/ -42.6% YTD due to (i) lower revenue; (ii) shrinkage in EBITDA margin -2.5ppt YTD from increase in labour and raw materials costs; and (iii) higher depreciation from new facilities with mass production for new key customer has yet to achieve optimal level.

Outlook. The challenges persist with the confluence of labour shortage and lack of components from supply chain disruptions which caused the group to not be able to fulfil the total orders demanded from customers. Nonetheless, prospects remains intact with several discussions taking place with new customers to contribute positively to future earnings. There is strong outlook from Customer X with order diversion from another contract manufacture following the recent labour issue. We expect the utilization rate for the 300k sqft facility at i-Park Senai Airport City to pick up steadily in coming quarters with the ramping up of foreign labour hiring.

Forecast. We knocked our FY22/23/24 earnings downwards by -12%/-12%/-10% respectively to factor in the gestation period before earnings recovery.

Maintain BUY, with TP of RM1.14. We take the opportunity to roll forward our valuation horizon to FY23 (from CY22). In light of rising interest rate environment and cost headwinds, we tweak our PE target lower from 18x to 16x. As the biggest EMS player in Malaysia with solid track record, we opine that VSI would be able to weather through the gloomy clouds while simultaneously scour for opportunities from the trade diversion.

Source: Hong Leong Investment Bank Research - 27 Jun 2022