We gathered that situation is improving with two major challenges of labour and supply shortage have been remedied. Order forecast guidance remains fairly unchanged. The group expects Customer X to be the main growth contributor with forecast of RM2.2bn for FY23. Orders from Customer X continue to be healthy with production pace picking up from the commenced mass production for new models. As guided previously, management expects the US customer, coffee brewer and pool cleaning customer to chart softer numbers on the back of recessionary fears. Maintain BUY with TP of RM1.14, pegged to 16x of FY23 EPS.

Recap. VSI chalked in a hopeful start with 1QFY23 core PATAMI of RM64.3m (-22% QoQ; +82% YoY) which came in within ours and consensus full year forecasts. Sales recorded improvement – +29% QoQ and +34% YoY – mainly due to better sales to major customers.

Bidding goodbye to the two major drags. We gathered that its situation is improving with two major challenges of labour and supply shortages have been remedied. The group is able to operate all of its plants without hiccup of man power shortage. At this juncture, we understand that supply chain and logistics issues are manageable as the group has stocked up on certain raw materials with longer le ad time.

Order forecast guidance remains fairly unchanged. The group expects Customer X to be the main growth contributor with forecast of RM2.2bn for FY23 (from previous guidance of RM2.1bn). Orders for Customer X continue to be healthy with production pace picking up from the commenced mass production for new models. As guided previously, management expects the US customer, coffee brewer and pool cleaning customer to chart softer numbers on the back of recessionary fears. Despite the risk of downward order revision from other customers, we gather that the order outlook from Customer X will be able to more than make up for the loss.

Possible upside from Customer Y. There arises a silver lining with potential for VSI to grow bigger, following the acquisition of Customer Y by “big US e-commerce”. Management shared that the said customer is looking to consolidate its supply chain by narrowing down to 2-3 suppliers from the current 6 (4 in China and 2 in Malaysia). With the still frosty US-China trade relation, VSI is confident that they will be able to benefit from it.

Indonesia to chart better earnings. Management expects VSI’s Indonesia operations to chart better earnings in FY23 following good momentum from customers’ orders with healthy utilisation of its plant. Additionally, management shared that some of the existing customers are inquiring on moving production to VSI Indonesia as part of diversifying strategy. As for China, the implementation of asset light model with streamlined operations is ongoing. Unfortunately, underutilization of capacity is expected to prevail at this juncture. Management expects losses to narrow further from the continual asset light strategy. Note that losses for 1QFY23 narrowed to -RM2.8m from -RM3.1m in 1QFY22.

Forecast. Unchanged. Maintain BUY with unchanged TP of RM1.14, pegged to 16x of 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 - 22 Dec 2022