• 4Q19 PATMI beat our estimates by 11% due to higher than expected revenue.
• VMS direct exposure in China is less than 10% but the shutdown has disrupted the supply chain and will negatively impact product deliveries in 1Q20.
• The outlook is positive with a rebound in 2H20. Growth in 2020 driven by two areas: (i) further outsourcing of the supply chain into SE Asia from China. This trend turned more acute after the recent outbreak; (ii) new products and customers in the Life Science Genomics and Healthcare Wellness domains.
• Maintain ACCUMULATE. Our target price is raised to S$18.10 (prev. S$17.18) as we roll-over into FY20e 14x PE. We kept our FY20e earnings largely unchanged. We expect a softer 1Q20 to be recovered in 2H20. VMS is gaining profit share in the global EMS sector, paying an attractive 4.2% dividend yield and enjoying a c.15% ROE business (despite net cash of S$714mn).

The Positive

+ Revenue was resilient. Revenue grew 2.9% YoY against our estimated decline of 7%. We believe outsourcing demand shifting away from China supported the growth. From FY17 onwards, VMS has managed to sustain its annual revenue run-rate to ~S$3.5bn level.

The Negatives

– Surge in trade receivables. Trade debtor surged 23% QoQ (or S$172mn) to S$898mn in 4Q19, despite revenue only rising 7% QoQ (or S$63mn). We are not alarmed. These are tactical extension of credit to Tier 1 customers. There are typical positive offsets for VMS.

– Higher operating expense offset the revenue growth. Total operating expenses jumped almost 8% YoY, outpacing revenue growth. The increase was in other expenses (+3.4% YoY) and employee expenses (+11.2% YoY).

Outlook

Outlook for FY20e is healthy. The outbreak has triggered many customers to shift more orders from China to SE Asia. However, there will be a time lag in qualifying VMS plants, sourcing new materials in SE Asia and raising capacity. Likely that customers are fast-tracking the qualification of VMS factories. Another growth area for FY20e will be new products and customers in the Life Science Genomics and Healthcare Wellness domains.

Maintain ACCUMULATE with higher TP of S$18.10 (prev. S$17.18)

Our valuation is based on a 14X PE multiple of FY20e profits. Forecast for FY20e is largely unchanged. We like VMS for its robust balance sheet, and deep value creation abilities owing to its strong R&D team.