• Results were largely in line with our expectations.
• VMS is gaining more customers and projects, partially due to the shift in supply chain to SEA
• Net margin declined to 9.8% from 10.5% a year ago from pricing pressure we expect it to continue in the near-term.
• Downgrade to ACCUMULATE with a lower TP of S$17.18 (prev. S$17.68). We revised our FY19e revenue upwards by 2.5% and lowered NPAT by 2.8%. We are still positive on VMS for the attractive yield and rising profit share amongst its U.S. peers.

The Positives

+ Gaining more customers and projects. VMS continues to grow its customer base. The on-going disruption in the electronics supply chain in China is benefiting VMS. We now know that VMS serves ~130 customers globally, up from ~100. An example of a new customer would be a young technology company recently listed in the United States with a market capitalisation of ~US$6bn. VMS expects new and several key products launch over the next 12mths. Anticipating these launches, we have adjusted both FY19e/FY20e revenue upwards by 2.5%.

The Negatives

– Pricing pressure affecting margins. VMS has been undergoing pricing pressure from existing customers. Although only less than 2% of total revenue is directly impacted by the trade war, we suspect the repercussions may be slightly greater. Anecdotally, we gathered that customers have been using the trade war as a reason to pressure the electronics supply chain to lower prices, even if their products are not affected by existing tariffs.  We expect this trend to continue and hence expect near-term softness in net margins. VMS still boast an impressive profit margin of 9.8% (vs 1.5% average U.S. listed peers).

Outlook

VMS is supporting several partners in their new and key product launches and will continue to benefit from the shift in supply chain by Original Equipment Manufacturers (OEMs) to mitigate tariffs. The group expects to see traction in its entries into new technology domains and ecosystems. We are still optimistic about VMS’ long-term growth potential because of the healthy pipeline of projects.

Downgrade to ACCUMULATE with a lower TP of S$17.18 (prev. S$17.68)

We revised our FY19e revenue upwards by 2.5% and lowered NPAT by 2.8%. Our valuation is based on a 14X PE multiple of FY19e profits. We like VMS for its robust balance sheet, and deep value creation abilities owing to its strong R&D team.