• VSI proposed a 1-for-1 bonus issue of shares, and a 1-for-5 bonus issue of warrants to all shareholders, expected to be completed by 2Q21
• We are positive on both exercises as it will further enhance trading liquidity while the warrants would allow the group to raise more cash for future expansion
• Reiterate Buy rating with a higher 12-month target price of RM3.78 pegged to a higher PER multiple of 26x (from 22x), in line with our recent upgrade on ATAIMS (AIB MK, RM2.85, Buy)

1-for-1 Bonus Issue

The proposed 1-for-1 bonus issue of shares will enlarge the existing 1.88bn share base to 3.76bn, or 3.84bn assuming all ESOS are exercised and treasury shares resold. The aim is to further enhance the trading liquidity of VSI’s shares. Both corporate exercises are expected to be completed by 2Q21.

Free Warrants to Reward Shareholders

VSI also proposed free warrants on the basis of 1 warrant for every 5 shares, up to 768.2m warrants. The warrant will have an expiry tenure of 3 years. The exercise price has not been determined, but based on an illustrative warrant price of RM1.50 (representing the theoretical ex-bonus price), VSI is expected to raise up to RM1.15bn, assuming the rights are fully exercised. Out of the total proceeds, 50% (RM576.2m) has been earmarked for future expansion of facilities, 30% (RM345.8m) for working capital and the remaining 20% (RM230.5m) to repay bank borrowing.

Raising Target Price to RM3.78

Similar to our recent upgrade on ATAIMS, we also raise our target price for VSI to RM3.78 (from RM3.20) after pegging it to a higher PE multiple of 26x (from 22x) on the CY21 EPS. We believe the rerating is justified given the scarcity premium for growth sectors locally and the EMS sector is expected to broadly benefit from more MNCs diverting more of their manufacturing operations to Malaysia. On that positive note, we expect VSI to be a prime beneficiary given its diversified customer mix. VSI remains our preferred sector pick and we reiterate our BUY rating.

Key Risk to Our Call

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 - 26 Feb 2021