A Strong Comeback; Upgrade to BUY

• Although 4QFY20 results improved sequentially, VSI’s FY20 core net profit fell by 31% yoy, largely due to losses incurred in 3QFY20.
• Still, the results were ahead of our expectations, but within consensus.
• Given the better-than-expected results, we raise our FY21-22E core EPS by 9- 11%, and lift our TP to RM2.48 (from RM2.26). Upgrade to BUY (from Hold).

Sequentially Higher on Low-base Effect; FY20 DPS of 2.6sen

Sequentially, VSI’s 4QFY20 results improved to RM58m (from 3QFY20 core LAT of RM15m), driven by both a recovery in the EBITDA margin to 11.2% (from 0.9% in 3Q; thanks to a higher-margin sales mix and reduced losses from the China operations) and a +75% qoq improvement in sales. VSI’s 3QFY20 results were its weakest since 4QFY11, as the Covid-19 lockdown impacted production and eroded margins. Elsewhere, VSI declared an interim dividend of 0.8sen for 4QFY20 and a final dividend of 0.8sen, bringing the FY20 DPS to 2.6sen (vs. FY19:4.4sen).

FY20 Core Net Profit Declined by 31% Yoy, But Exceeded Expectations

Despite the stronger 4QFY20 results, VSI’s FY20 core net profit fell by 31% yoy to RM121m, due to the decline in sales orders from its key customer (one of the floor-care models reached end of life), and the negative impact from the Covid-19 MCO in 3QFY20. Overall, the results were within street expectations but ahead of ours, accounting for 104% of the consensus and 121% of our full-year forecasts. The variance against our forecast was largely due to better-than-expected margins.

Prospects Look Encouraging on Healthy Order Flow From Key Customers

Moving into FY21, VSI’s earnings are projected to resume a growth trajectory, considering the encouraging sales orders from key customers, underpinned by organic sales growth on the back of new projects and the shift in supply chain motivated by the trade tensions. Management expects the strong order flow to be sustained in the nearterm, and the existing capacity likely to be filled by CY21. To cater for future expansions, management had guided during the previous briefing that it is allocating c.RM100m in capex to increase the production floor space to >2m sq ft (from est.1.7m sq ft).

Raise FY21-22E EPS by 9-11%; Upgrade VSI to BUY

We raise our FY21-22E EPS by 9-11% to account for higher revenue contribution from its Malaysian operations and higher PAT margin assumptions of 4.7%-5.2% (from 4.3- 4.7%), and introduce our FY23 forecasts. In tandem, we raise our TP to RM2.48 (from RM2.26) based on an unchanged CY21E target PER of 19x (+1SD 5-year sector mean PER). Upgrade to BUY (from Hold). VSI is our preferred pick for the EMS sector.

Key risks

Downside risks include: i) single key customer risk; ii) reliance on foreign labour, iii) competition risk, iv) a downturn in the household appliances industry, and v) an economic slowdown.

Source: Affin Hwang Research - 29 Sept 2020