• VSI will be acquiring 6 pieces of land with a total size of 414k sf, boosting production floor space by c.25%.
• The additional capacity will be catered for a new US-based Customer Y, thanks to the China trade diversions.
• Reiterate our Buy rating, with unchanged target price of RM2.70 (based on 19x CY21 target PER).

Acquiring Land & Building for Expansion…

VSI has entered into a sale and purchase and construction agreement with Ipark Development Sdn Bhd, a subsidiary of AME Elite to acquire 6 pieces of land with industrial buildings with a total land size of c.414k sq ft in Senai, Johor for RM99m. The approximate acquisition cost per sq ft is equivalent to RM239, comparably higher to the last transacted industrial plot at RM80/sf in Senai Airport City as it includes the cost of building amenities constructed to VSI’s production requirement. We are positive on the acquisition as this will increase the current production land area by c.25% to >2m sq ft, which will cater for the newly secured US-based Customer Y and as VSI’s new headquarters (HQ). The group plans to free up the existing HQ and manufacturing space for Victory’s production. VSI will be spending a total of c.RM150m for this expansion to be funded via internally generated funds and bank borrowings.

… With New Customer Y Secured

Elsewhere, VSI has also secured another new US-based Customer Y, thanks to the rerouting of supply chain opportunities presented by the escalating trade tensions. During the briefing, we learnt that VSI will be producing home appliances for Customer Y, which products do not compete directly with VSI’s existing customers. Mass production of the first model will likely begin in 2QCY21, with management guiding that this customer could potentially contribute c.RM1bn revenue within the next 2 years.

Reiterate Buy With Unchanged TP of RM2.70

We raise our FY23E EPS by 4% to incorporate higher contribution from Customer Y. All in, we maintain our 12-month TP of RM2.70, based on an 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%. Maintain BUY. VSI is our preferred pick for the EMS sector. Key downside risks include: i) dependence on single major customer; ii) reliance on foreign labour, iii) competition risk, iv) a prolonged US-China trade standoff, and v) a slowdown in the economy.

Source: Affin Hwang Research - 18 Oct 2020