VSI’s FY22 core PATAMI of RM200.8m (-25.6% YoY) came in above our and consensus expectations at 108% and 107%, respectively. Despite the confluence headwinds from labour shortage and disruption in supply chain the group results steadily improved QoQ. We foresee better earnings in the coming quarters from the ramp-up of their utilization rate as the labour shortage has been remedied coupled with manageable supply chain issue with stock buffer. Reaffirm BUY, with unchanged TP of RM1.14 based on 16x PE, pegged to FY23 EPS.

Above estimates. VSI’s 4QFY22 revenue of RM1.0bn (QoQ: +8.3%; YoY: 6.7%) translated into core PATAMI of RM81.9m (QoQ: +89.9%; YoY: +31.0%). This brought FY22’s sum to RM200.8m (-25.6% YoY) which beat expectations at 108%/107% of our/consensus forecasts, respectively. The outperformance was attributable to higher than-expected core EBITDA margin. FY22 one-off adjustments include net forex gain (-RM14.6m), loss of disposal of PPE (+RM7.4m), impairment loss on PPE (+RM12.4m) and impairment loss on investment in associates (+RM25.8m).

Dividend. Declared fourth interim dividend of 0.4 sen/share (ex-date on 13 Oct 2022) and final dividend of 0.4 sen/share subject to shareholders’ approval. YTD DPS amounted to 2.0 sen vs. FY21’s 4.2 sen.

QoQ. Top line improved +8.3% to RM1.0bn due to better contributions from Malaysia (+10.1%) and China (+8.7%) which more than offset the drag from Indonesia (-10.1%). Core PATAMI leaped by 89.9% to RM81.9m attributable to (ii) improvement in core EBITDA margin by 2.0ppt and; (ii) positive MI charges.

YoY. Revenue increased by +6.7% attributable to growth in Malaysia (+11.2%) despite the muted contributions from Indonesia (-7.2%) and China (-66.4%). China remained lacklustre with losses expanded to -RM37.4m (vs -RM10.2m in SPLY) on the back of capacity under-utilisation in the absence of large orders and challenging operating environment. On the flipside, core PATAMI staged a +31.0% increment with expansion in core EBITDA margin by 0.5ppt coupled with positive MI.

YTD. FY22 revenue registered a tad decline by -2.2% at RM3.9bn. The softness in sales with the lower delivery of orders to key customers during the period due to labour shortage and disruption in the component supply has led to reduction in core PATAMI by -25.6% to RM200.8m.

Outlook. We understand that majority of the allocated quota of 3.7k foreign workers has come in and we foresee better earnings in the coming quarters from the ramp-up of their utilization rate as the labour shortage been remedied. Subsequently, we expect the utilization rate for its i-Park Senai Airport City facility to pick up steadily and we reckon that this could be one of the biggest revenue contributors once the production starts to ramp-up fully. As this juncture, we gather that supply chain and logistics issues are manageable as the group stocked up on certain raw materials with longer lead time. Additionally, prospects remains intact with several discussions taking place with new customers to contribute positively to future earnings.

Forecast. Unchanged.

Maintain BUY, with unchanged TP of RM1.14 based on 16x PE, pegged 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 from the trade diversion.

Source: Hong Leong Investment Bank Research - 28 Sept 2022