VSI’s chalked in 1QFY23 core PATAMI of RM64.3m (-22% QoQ; +82% YoY) which matched our and consensus expectations at 24% of full year forecasts. Sales recorded improvement QoQ and YoY mainly due to better sales to major customers. Moving forward, we foresee better earnings from the ramp-up of their utilization rate as labour shortage has been remedied from the arrival of 3.7k foreign workers. At 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. Reiterate BUY recommendation with unchanged TP of RM1.14 pegged to PE multiple to 16x to FY23 EPS.

Within expectations. VSI’s recorded 1QFY23 revenue of RM1.3bn (+29% QoQ; +34% YoY) which translated into core PATAMI of RM64.3m (-22% QoQ; +82% YoY). This came in line within ours and street estimates at 24% of full year forecast. Note that 1QFY23 core PATAMI sum has been arrived after adjusting for (i) net forex loss of RM5.5m; and (ii) gain on disposal of PPE of -RM1.9m.

Dividend. Declared first interim dividend of 0.5 sen/share; ex-date 16 Feb 2023 (1QFY22: 0.4 sen/share).

QoQ. Top line climbed by +29% to RM1.3bn attributable to better sales across the region from Malaysia (+11%), Indonesia (+41%) and China (+5%). Bottom line registered a -22% decline to RM64.3m attributable to core EBITDA margin compression of -2ppt.

YoY. Revenue staged a 34% increment thanks to better sales from Malaysia (+62%) and Indonesia (+34%) that more than offset the drag in China (-59%). Encouragingly, Indonesia operations recorded 2.3x improvement in PBT to RM4.8m (1QFY22: RM2.1m) in tandem with the better sales. Losses in China narrowed to -RM2.8m (1QFY22: -RM3.2m) but the operating environment remained challenging in the absence of large orders and was insufficient to cover fixed cost. Core PATAMI climbed further by +82% to RM64.3m in line with better sales and expansion of core EBITDA margin by 0.7ppt. Recall that 1QFY22 was hit with higher depreciation from new facilities and cost incurred for Industrial Vaccination Centre (PPVIN) under PIKAS.

Outlook. We foresee better earnings in the coming quarters from the ramp-up of their utilization rate as labour shortage has been remedied from the arrival of 3.7k foreign workers. Subsequently, we expect the utilization rate for its i-Park Senai Airport City facility to pick up steadily once the production starts to ramp-up fully. At this juncture, we gather that supply chain and logistics issues are manageable as the group has stocked up on certain raw materials with longer lead time. Additionally, despite the risk of downward order revision from other customers in light of the recessionary fears, we gather that the order outlook from Customer X will be able to more than make up for the loss.

Forecast. We updated our model for FY22 audited accounts and introduce FY25 forecasts. After making housekeeping changes our FY24 forecast is lowered marginally by -2.9%.

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 - 19 Dec 2022