Investment Highlights

• We maintain HOLD on ViTrox Corporation (ViTrox) with a higher fair value of RM11.48/share, pegged to an unchanged FY22F PE of 35x (previously RM10.56/share).
• Our target PE is at a slight premium to our benchmark target PE for large-cap automated test equipment (ATE) players of 33x, given the group’s technology leadership and higher market cap The benchmark PE represents a 50% premium over the 3-year historical forward PE of 22x as prospects brighten for the ATE sector riding on innovations such as 3D sensors, Industry 4.0, electric and autonomous vehicles, and 5G. Accelerated by the Covid-19 pandemic, these innovations have also benefitted from the US-China tech decoupling.
• We raise our FY20F–FY22F forecasts by 5–10% due to expectations of strong orders for the next couple of quarters.
• Key takeaways from ViTrox’s 3QFY20 conference call are as follows:
  • Results summary: 9MFY20 core profit came in line with expectations at RM77mil (+22% YoY), largely due to higher demand for its machine vision systems (MVS), which grew 92% YoY and optimization of production capacity. The growth in MVS was mainly due to a near tripling of MVStray (MVST) revenue (Exhibit 1). On a YTD basis, Taiwan and China contributed 74% of MVST revenue.
    
    ViTrox recorded its highest quarterly revenue of RM124mil in 3QFY20 boosted by the strongest MVST revenue of RM35mil achieved. On a QoQ basis, core profit rose 20% due to increased demand of automated board inspection (ABI) and MVS-standard (MVSS) by 35% and 68% respectively due to favourable market conditions and positive acceptance of its new products (Exhibit 5).
     
  • Outlook: Strong ABI demand is seen attributed to the computing segment, especially that which related to servers and data centres due to increased work-from-home requirements and Covid-19-related medical segment. It was also driven by a recovery in the mobile devices and automotive segments particularly from China, Taiwan and Malaysia with opportunities for new accounts and repeat orders for China and Taiwan.
    
    Meanwhile, the pipeline from the USA and Europe is also strong, primarily from telecommunications, automotive and aerospace market segments. At the same time, MVS orders are strengthening and have rebounded from post Covid-19 lockdowns in April–May 2020 as the outlook remains bright for the next two quarters.
     
  • Strategy: ViTrox will continue to diversify and grow its customer base for MVS while increasing operational efficiencies to reduce end-to-end lead time of its products. The group aims to regularly engage and add more sales channel partners (SCPs) and continue with new product introductions (NPIs) with artificial intelligence (AI) capabilities. For the ABI segment, the group will launch low-cost 3D automated optical inspection (AOI) machines and focus on technology differentiation to appeal to high-volume yet price- sensitive customers and maintain its margins..
     
• We continue to like ViTrox due to its leadership in MVS and ABI, alongside its following key merits: (i) market diversification efforts targeting high-growth regions i.e. Taiwan and China; and (ii) its focus on product innovation and improvements in lead time to strengthen its portfolio offerings. However, we deem that the stock is fairly valued at the current price.

Source: AmInvest Research - 26 Oct 2020