A Mild Winter After All

9MFY7/19 core net profit of MYR112m (+1% YoY) beat expectations at 87%/85% of our/consensus full-year forecasts on a narrower cut in orders by key customers and better-than-expected cost management. We raise FY19/20/21 net profit forecasts by 12%/5%/3%. We believe that VSI has the capacity and capability to take on more jobs from the supply chain reconfiguration due to the US-China trade tension. Maintain BUY; our TP is lifted to MYR1.30 (+4%), pegged at an unchanged 15.5x CY20 PER (10% below the average 17x target for tech names in our coverage).

Cost Realignment to Sustain Margins

Despite a widely expected decline in order flow from VSI’s largest client in Malaysia, revenue only contracted 10% QoQ in 3QFY19. Commendably, VSI was able to maintain its profit margins (especially for its Malaysian ops despite lower production scale) due to cost cutting taken since end - 2018. Our last forecast adjustment took into account a larger revenue cut from this client as well as some margin contractions. In 3QFY19, VSI also incurred higher losses at its China ops (pre-tax loss widened to MYR10m from MYR4m in 2QFY19) due to some one-off restructuring cost; we expect the loss to continue into 4QFY19.

Another Win Will Bring Back Investor’s Confidence

With several new job negotiations still in progress, we believe that VSI could secure another job by end-CY19 (likely for FY21 commencement) to occupy its new 180k sq ft facility, ready by 3Q19. VSI’s Malaysian ops will remain the centre of focus whereby more investments in automation will be adopted (especially in the two new plants) as long-term measures to lift its profitability and reduce dependency on foreign labour. We have not factored in any more win beyond Bissell, secured in Mar 2019.

Potential Upside to Our Earnings Forecasts

The 180k sq ft plant will enable VSI to capture a job worth up to MYR1b; a potential 20-25% boost to our FY21 estimates. Diversification away from the consumer electronics segment into targeted new areas such as medical devices would be positive. Our assumptions are in Fig.4, 5.

Source: Maybank Research - 3 Jul 2019