Investment Highlights

• We maintain our SELL call on ViTrox Corp (ViTrox) with a higher fair value of RM12.03/share, pegged to an unchanged FY22F PE of 35x (previously 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.

• 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.

• We raise our FY21F–FY23F forecasts by 5% after accounting for stronger machine vision systems (MVS) and automated board inspection (ABI) revenues.

• Key highlights from ViTrox’s 4QFY20 conference call:

• Results summary: ViTrox recorded its highest yearly revenue to date in FY20 of RM470mil, driven by strong growth in MVS and ABI which rose by 110% and 10% YoY respectively due to favourable market conditions and positive market acceptance for its new products (Exhibit 1). Core profit jumped 34% due to the optimization of product capacity amid the higher sales volume. The strong MVS demand was mainly due to MVS-tray (MVST) more than twofold on a YoY basis (up by 223%) as more orders came in from China and Taiwan. Meanwhile, for the ABI segment, the top three customer segments in FY20 were computing, automotive, and telecommunications (Exhibit 3).

• Outlook: Overall outlook for MVS and ABI is expected to be positive going into FY21.

MVS-standard (MVSS) demand is anticipated to be strong for 1HFY21 following the trend in 2HFY20 which saw higher orders following economic recovery in China and Taiwan, and due to a demand surge in 5G smartphones, networking devices, IoT, computing, data centres, and electric vehicles. Similarly, MVST demand from China and Taiwan is expected to remain strong and contribute 75% of MVST’s 1QFY21 revenue. ViTrox plans to win back market share in Taiwan and penetrate into the Korean market with its latest 3rd generation TH/TR3000 series.

Despite a 10% YoY growth seen in FY20, ABI outlook for 2021 is promising with a strong funnel coming from: (i) recovery in smartphones, 5G and automotive; (ii) more orders from Asian countries due to the US-China trade tensions; (iii) new customer acquisitions; and (iv) higher replacement activities by key customers. As at 12 February 2021, ABI has RM46mil of order backlog. Key regions expected to see growth are China, Taiwan, Malaysia, the USA and Mexico. High growth market segments in 2021 are expected to be 5G and semiconductor, which the group will focus its efforts on to develop new capabilities.

• Capacity expansion plans: ViTrox is aiming to double its capacity to cater for the robust demand, earmarking a total of RM120mil capex for the next two years up till 2023, where 46% is allocated for land purchases while the remainder will be for buildings. We have reflected this capex guidance in our numbers.

• 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 - 26 Feb 2021