What’s New

•  Outlook remains positive…… We attended VS’ analyst and fund manager briefing yesterday and came back feeling optimistic on its growth prospects. Overall, we expect another stellar performance for the Group’s FY20F earnings, underpinned by steady orders from one of its existing key clients, Keurig and Bissell under its Malaysian operation.
•  ……. with catalyst brewing for the stock. Furthermore, any sizeable order wins from new customer(s), especially in the US as well as realisation of asset monetisation in China operation pursuant to its on-going rationalisation exercise and subsequent special dividend payout, if any, could further propel its share price in the near term.

Comment

• Result recap. To recap, VS recorded RM48.1m net profit in its 1QFY20 results which surged 20.9% yoy mainly attributed to smaller losses incurred from its operation in China following streamlining and restructuring exercises by adopting an asset-light and lower-cost model which resulted in lower operating expenses, coupled with the absence of loss on disposal of a subsidiary in the previous year’s corresponding quarter. Topline wise, Malaysia continued to be the Group’s anchor top-line contributor, accounting for 85.0% of 1QFY20’s revenue with the remainder from its China (7.1%) and Indonesia (6.8%) operations.
• Anticipating better FY20F. VS envisages orders from one of its major clients under the Malaysian operation to remain stable with placements of 6-12 months’ orders in advance. On business with Keurig, management expects to see double-digit growth in its topline as the client plans to launch more than 5 models this year and the Group could capture more orders under its Malaysian operation with Keurig’s intention of looking beyond Chinese suppliers as a result of trade war. Overseas operations wise, VS expects its Indonesian operation to remain profitable or at least breakeven for FY20F. Meanwhile, for China, the management reckons that the operating atmosphere remains challenging and underutilisation of capacity to prevail at this moment with guidance of RM20m loss before tax in FY20F.
• Bissell production running smoothly and more orders underway. The production for Bissell is progressing well. The Group has recently commenced mass production for one model at the 160,000 square feet dedicated facility and the utilization rate is gradually picking up. Moving ahead, there are 2 more models in the pipeline and shall come onstream during 1QCY20. Overall, the 3 models could render RM150m revenue to the Group in FY20F with gross profit margin of 15%. Management guided that a total of 5 models are to be confirmed by the client before end of this year.
• Seizing the opportunities on trade diversion activities. Although the US and China have agreed on phase 1 of the trade deal, we foresee tougher negotiations ahead for remaining phases as it involves technological transfer, intellectual property issues and the technological restriction imposed by the US on China still remains. Hence, we believe that VS’ efforts to continue engaging with prospective customers, especially in the US will finally bear fruit. The Group is in the midst of negotiating terms while pursuing various sales leads arising from trade diversion activities. Many MNC brand owners are relocating their manufacturing base from China to Southeast Asia, with Malaysia being one of the choice locations. As one of the leading Electronics Manufacturing Services (EMS) providers in Malaysia as well as in the region, VS stands to benefit from this diversion. It is also opportune that the Group has ready production facility to take up these new businesses.

Earnings Outlook/Revision

• We increase our FY20F and FY21F net earnings estimates marginally by 2.4% and 3.1% to RM172.5m and RM202.6m respectively in view of narrowing losses in its China operation.

Valuation & Recommendation

• We reiterate our BUY call on VS with a slightly higher target price of RM1.56 (from RM1.52) following our earnings upgrade. Our revised target price is pegged at unchanged PE multiple of 14x FY21F EPS.  Waiting for catalyst. We opine that the stock could garner investor interests pinning hopes on potential order wins from new customers and potential special dividend payout arising from asset rationalisation in its China operation whilst existing key clients under its Malaysia operation continue to drive the Group’s topline-line and bottom-line growths.

Source: JF Apex Securities Research - 10 Jan 2020