• 4Q20 net profit declined 10% YoY to S$86.6mn. FY20 profit was in line at 101% of our forecast Revenue was slightly below at 96%.
• Net cash piled to a record S$928mn, supported by FCF of S$425mn in FY20.
• VMS is pivoting to new growth drivers: electric-vehicle (EV) batteries and wafer-fab equipment. EVs are expected to experience explosive multi-year growth, especially in the Chinese market. VMS intends to expand its manufacturing cluster in China. Equipment for gene sequencing is another exciting area undergoing massive innovation.
• Remain NEUTRAL. We nudge up FY21e PATMI by 3%. Accordingly, our target price climbs to S$19.20 from S$18.60, still at 5-year historical average P/E of 16x. Attractive 4% yields are backed by a large cash hoard.

The Positive

+ 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.

The Negative

+ 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.

Outlook

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.