• We remain upbeat on VSI’s outlook on the expectation of rising orders from key clients. Moreover, operating margins could positively surprise on lesser reliance on key Customer X.
• We raise our FY21-23E core EPS by 6-9%, projecting higher revenue from prospective orders from new customers and assuming higher margins.
• Reiterate our Buy rating, with higher target price of RM2.70 (based on CY21E target PER of 19x).

Recap of 4QFY20 Results

Despite the 15-16% yoy declines in both 4QFY20 revenue and net profit, VSI’s EBITDA margin rose by 1.6ppts. This was mainly due to a higher-margin sales mix and ramp-up in production from the US-based key Customer B. The decline in Customer X’s battery-pack orders, which are lower margin in nature, also helped bump up overall margins, coupled with reduced losses from its China operation.

Expecting Higher Order Flows From Existing Customers

Overall, VSI’s customer orders are expected to remain robust. Despite the lower expected orders from key Customer X, we expect this will be compensated by higher orders from the other key customers. For instance, US-based Customer B will see 6 new models coming on stream progressively, and Victory will commence operation by 1QCY21. Management is also guiding for higher order flows from pool-cleaning Customer Z and coffee brewer Customer K.

Capacity increase a positive sign; a beneficiary for ongoing trade tensions

VSI remains confident in sustaining its business growth as it is looking to allocate RM100m capex to further expand its current production floor space capacity to >2m sq ft (from current 1.7m sq ft). Also, we understand the Group is still in advanced talks with a prospective customer. We have assumed new contracts from new customers worth RM450m/600m/630m for FY21E/22E/23E into our forecasts. This reinforces our view that VSI continues to be a prime candidate to seize any future order diversions from the ongoing US-China trade tensions.

Reiterate Buy and Raise TP to RM2.70

We raise our EPS by 6%-9% post VSI’s briefing on expectations of better profitability ahead as revenue and margin mix turn more favourable. Post our earnings upgrades, we raise our 12-month TP to RM2.70, based on unchanged CY21E PER of 19x. We like VSI for its: i) diversified customer mix, ii) strong ability in securing new contracts which makes it a prime beneficiary of trade diversion, iii) earnings growth on the back of new orders and potential narrowed losses from its China operations, and iv) modest dividend yields of 2-3%. BUY: VSI is our preferred pick for the EMS sector.

Source: Affin Hwang Research - 2 Oct 2020