• 1QFY21 core net profit came in within our and consensus expectations. Meanwhile, 1Q revenue made up 21% of our full-year estimate as new orders are expected to gradually commence
• We expect a record 106% yoy earnings growth in FY21 backed by strong orders from existing and new customers
• Reiterate Buy, with an unchanged 12-month target price of RM3.20 (pegged to 22x CY21E EPS)

Strong quarter was expected due to high backlog

VS Industry (VSI) reported a strong set of 1QFY21 numbers, consistent with the other EMS players. 1QFY21 core net profit increased 35% yoy to RM67m, and in line with our and consensus expectations, accounting for 28-29% of the respective forecasts. The customer backlog, coupled with a better product mix, helped drive the EBITDA margin improvement by 2.9ppts yoy. This was despite its China operations having reported a larger-than-expected RM5.5m loss before tax (9M20 average quarterly loss: RM3.2m) due to continued under-utilization. Its Indonesian operations reported a RM0.5m PBT (1QFY21: RM1.1m), but could swing back into the red in the coming quarter, given the quarterly trend. An interim 1.2sen DPS was declared vs. 1sen in 1QFY21.

Commencement of new customer orders from 2HFY21

We expect VSI to report its strongest yoy earnings growth in FY21, attributed to strong indicative orders from its existing customers and those of new customers secured of late. 1QFY21 revenue accounted for 21% of our full-year estimate, with production expected to commence in 2HFY21 for the 2 new customers secured in August and October 2020. To recap, VSI secured a US customer to produce 2 models of cordless electrostatic sprayers, as well as a US-based home appliance customer.

Reiterate Buy with unchanged TP at RM3.20

Broadly, EMS has been one of the few sectors that have been spared from the weak economic environment, driven by higher demand for home appliances from the new work-from-home norm. The escalation of trade tensions, despite the Biden win, will continue to make the local EMS space a prime beneficiary. VSI with its diversified customer mix stands to benefit the most vis-à-vis its peers. VSI remains a sector top Buy with an unchanged TP of RM3.20, based on a 22x target PER (+2SD sector 5-year mean) on CY21E EPS. Downside risks include: 1) lower customer orders; 2) potential foreign labor issue, 3) prolonged US-China trade stand-off, and 4) worsening global economic environment.

Source: Affin Hwang Research - 18 Dec 2020