+ Margins stable. Despite weaker revenue, VMS managed to contain costs and expand PBT margins by 1.2% points to 11.9%. 2H20 GP margins rose to 26.1% from 25.2% in 2H19 (Figure 1). This was aided by a higher mix of life-science products. Operating expenses such as staff and other expenses fell in line with the weaker revenue.
+ Record operating cash flows. Net cash jumped 30% to a record S$928mn in December 2020. Operating cash flows in FY20 were S$453mn. Positive working-capital generation of S$114mn was largely due to a normalisation of trade debtors in early 2020.
+ Revenue softer than expected. Revenue only improved a modest 1% QoQ to S$828mn. Average improvement in the prior two quarters was 12%. We believe the drag came from weaker point-of-sale terminals. A sluggish retail environment due to the pandemic reduced the need for such terminals. On the other hand, demand for ventilators and diagnostic equipment rose.
FY21 should be a year of recovery from a supply-chain-disrupted 2020. A stronger global economy should, moreover, provide impetus to VMS’ earnings growth. To exceed its record earnings of FY17/18, VMS is pivoting to new product categories such as EV batteries, wafer-fab modules and gene-sequencing equipment. Some products are new introductions that will require time to scale up. China is becoming a key market for potentially vast healthcare and EV demand. VMS will raise its manufacturing and engineering presence in China.
Maintain NEUTRAL with a higher TP of S$19.20, from S$18.60
We increase FY21e earnings by a modest 3%. Net cash of S$928mn, dividend yields of 4% and ROEs of 13% remain attractive investment merits of the company.