Investment Highlights

• We maintain our SELL recommendation on ViTrox Corporation (ViTrox) and keep our forecasts and fair value unchanged at RM12.03/share, pegged to an FY22F PE of 35x. There is no price adjustment for ESG based on a 3-star rating as appraised by us (Exhibit 4).

• Our target PE of 35x 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.

• ViTrox’s 1QFY21 results were within expectations, recording a core profit of RM33mil, after excluding a RM2mil exceptional loss from net inventories written down. The results represented 24% and 23% of our and consensus FY21F estimates respectively.

• YoY: 1QFY21 revenue and core profit jumped by 44% and 46% respectively due to higher demand of machine vision systems (MVS) which we believe is likely due to higher orders from Taiwan and China. In FY20, the group’s key MVS and automated board inspection (ABI) segments accounted for 41% and 57% of revenue respectively, while the remaining 2% was contributed by the electronics communication system (ECS) segment.

• QoQ: 1QFY21 core profit declined 4% due to: (i) a 19% decline in revenue mainly due to lower ABI sales as a result of the global material shortage and transportation challenges amid the Covid-19 pandemic, as well as 4QFY20 showing exceptionally strong ABI demand, and (ii) favourable sales mix leading to a 3.8 ppts higher PBT margin of 24.6% in 1QFY21.

• We are cautiously optimistic on the outlook for FY21F. Driven by stronger demand across all business units tied to rising demand relating to 5G, electric vehicles (EVs), computing, and artificial intelligence (AI), the group plans to expand manufacturing capacity by at least 30% in 2021. However, the group is currently dealing with a global shortage of certain raw materials used in its products and this has been causing a longer material lead time.
   
• We continue to like ViTrox but valuations for the stock are currently expensive, trading at FY21–FY22 PE of 42-50x. 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 - 23 Apr 2021