Investment Highlights

• We downgrade our HOLD call on ViTrox Corp (ViTrox) to a SELL with an unchanged fair value of RM11.48/share, pegged to an FY22F PE of 35x. This is at a slight premium above our benchmark target PE for large-cap automated test equipment (ATE) players of 33x, given the group’s technology leadership and higher market cap. We maintain our forecasts.

• The benchmark 33x 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.

• ViTrox’s 4QFY20 results slightly exceeded expectations, recording a core profit of RM34mil which brings FY20 core profit to RM111mil, after excluding RM6mil exceptional loss mainly from net inventories written down. The results beat ours and consensus’ full-year estimates by 6% and 2% respectively after recording its highest quarterly revenue to date in 4QFY20.

• YoY: FY20 core profit surged 34% due to 39% higher revenue amid higher machine vision systems (MVS) and automated board inspection (ABI) demand. In 9MFY20, MVS and ABI accounted for 42% and 57% of revenue respectively.

• QoQ: 4QFY20 core profit rose 14% in tandem with a 29% revenue increase on strong sales volume of MVS and ABI products which resulted in a more optimal production capacity. The strong demand was supported by favourable market conditions and the positive response to the group’s new products introduced. However, PBT margins fell to 21% (vs. 26% in 3QFY20) due to an unfavourable product mix and RM3mil realized forex losses during the quarter.

• FY21F outlook remains positive driven by stronger demand across all business units and as the group is starting to expand manufacturing capacity by at least 30% in 2021 to cope with the robust demand. However, the group is currently dealing with a global shortage of certain raw materials used in its products which has been causing a longer material lead time.

• We continue to like ViTrox but valuations for the stock are currently lofty. ViTrox’s positive prospects arise from 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.

Source: AmInvest Research - 25 Feb 2021