Investment Highlights

• We maintain our SELL recommendation on ViTrox Corporation (ViTrox) with a higher fair value of RM13.24/share, pegged to an FY22F PE of 35x (previously RM12.03/share). There is no price adjustment for ESG based on our 3-star rating (Exhibit 6).

• We raise FY21–FY23F earnings by 6–10% to account for expectations of more robust demand for its machine vision systems (MVS) products. This is due to the global shortage of semiconductor components which is expected to extend into 2022 and higher sales relating to the automotive, consumer, computing, and 5G devices.

• Key takeaways from ViTrox’s 1QFY21 conference call are as follows:
  • Results summary: 1QFY21 revenue and core profit rose 44% and 46% YoY leading to ViTrox recording its highest ever 1Q sales, driven by strong demand from its MVS segment which expanded 117% YoY driven by strong demand particularly from China and Taiwan. MVS-tray (MVST) and MVS-standard (MVSS) grew by 113% and 126% YoY respectively. Meanwhile, the automated board inspection (ABI) segment revenue rose by 3% as 1QFY21 saw lower sales impacted by the global material shortage and transportation challenges amid Covid-19, as well as 4Q being a record quarter for ABI. The top 3 market segments for ABI are telecommunications, automotive, and computing (Exhibit 3).
     
  • Development of ViTrox Agritech: In 2020, ViTrox started R&D activities in precision farming under its new subsidiary ViTrox Agritech to create and promote innovative hi-tech and cost-effective smart agriculture solutions to reduce labour dependencies, promote better yields, and reduce the use of pesticides in the local agriculture industry. The global agriculture robot market is set to grow by a CAGR of 34.5% from 2020 to 2025. ViTrox has set up a smart farming development roadmap and is investing approx. RM5mil for its first hi-tech farm cluster in Ara Kuda, Penang. The group expects meaningful contribution in 2–3 years’ time.
     
  • Outlook: ViTrox expects its quarterly performance to continue to improve on a quarterly basis as the group expects its MVSS and MVST revenues to reach new highs in 2QFY21 due to very strong demand across various sectors, especially from China and Taiwan, which is expected to continue in 2H of 2021.

ViTrox has resolved most of its material shortage for ABI segment except for one critical part and is working closely with its supplier to resolve the issue. ABI revenue in 2QFY21 is also expected to come back strongly due to a potential backlog of RM60mil to be recognized for the quarter. Also, its 2021 outlook continues to remain positive with its growing funnel of RM286mil as at 15 April 2021 due to the fast growth in demand from the automotive and telecommunication segments.

• We continue to like ViTrox but valuations for the stock are currently expensive, trading at FY21–FY22 PE of 43–52x. 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 Apr 2021