Risk reward improves
U/G to BUY as FY22E growth accelerates
VMS’ 2H21 PATMI of SGD171.7m (+3% YoY, +22.3% QoQ) met the street’s expectations and beat ours. We raise our FY22-23E PATMI by 10% as supply side bottlenecks are easing faster than we expected. This, coupled with a robust demand outlook, should catalyse an acceleration in earnings growth and help the stock rerate higher. We U/G to BUY from HOLD, and our TP is 9% higher at SGD21.00 (17.2x P/E, implying 0.5SD above LT mean).
Sequential recovery in output
4Q21 revenue grew 9.2% YoY/ 17.6% QoQ to SGD905.4m. Recovery of production rates drove quarterly growth as i) VMS enjoyed full worker capacity in 4Q21 in Malaysia, aided by ii) easing components shortages. It is noteworthy that 4Q21 net margin was maintained YoY at 10.5% (FY21: 10.0%), underscoring VMS’ ability to manage cost and seek productivity gains despite an inflationary environment.
Robust demand outlook
VMS expects the demand outlook to be robust. Demand strength is seen in life science, instrumentation, test & measurement, networking & communications, advanced industrials as well as lifestyle and wellness. Several of these domains are also expected to see new product introductions in the year. VMS’ R&D labs are engaged in products in growing trends in next-gen sequencing and other breakthrough
technologies. That said, chip shortages remain an impediment in FY22E and could limit VMS’ growth, in our view.
Risk reward has turned positive
VMS fell only 4% YTD, outperforming some in our tech stock coverage which fell 15-20% amid the global tech sell-off. Coupled with a 4% yield and accelerating earnings growth in FY22E, we believe the stock has
bottomed and risk reward has now turned positive. Chairman Mr. Wong bought 200,000 shares on 8-Nov at an average of SGD18.73, which we interpret as a signal of confidence in VMS’ prospects. In our view, key risks include i) worsening of supply side problems due to Covid-19 or geopolitical tensions; and/or ii) slowdown in global growth that might impact the demand outlook.