Investment Highlights

• We upgrade ViTrox Corporation (ViTrox) to a HOLD (from SELL) with a higher fair value of RM19.11/share (previously RM13.43/share). Our valuation is pegged to a revised FY22F PE of 44.4x at +1SD valuation (from 35.0x). We make no ESG adjustment to reflect our 3-star rating (Exhibit 3).

• 1-for-1 Bonus Issue and Share Grant Scheme (SGS): ViTrox has proposed to undertake bonus issue of up to 472.43 million new ordinary shares for every existing shares. In addition, the group has established SGS of up to 5% of the total number of issued shares for eligible executive directors and employees of the group. The proposed Bonus Issue is expected to be completed in 1Q 2022 while the SGS in 1H 2022.

• Positive impact to ViTrox shares: The Bonus Issue is expected to enhance trading liquidity as well as providing a lower entry point for ViTrox shares, enticing a wider range of investors. The theoretical ex-bonus share price shall range between RM9.29 and RM10.43, based on daily VWAP of its shares during the 3-month period up to 26 Oct 2021.

• Cukai Makmur impact: ViTrox is not expected to be adversely affected by the recent announcement of Cukai Makmur in Budget 2022, due to its subsidiaries, ViTrox Techonologies Sdn. Bhd (VTSB) and ViE Technologies Sdn. Bhd. (ViE) being granted pioneer status by MITI. Business income generated by entity granted pioneer status is exempted from tax. Furthermore, Cukai Makmur will be imposed at the individual subsidiary level, further reduced the risk of the group being impacted by the windfall tax.

• Higher earnings estimate: We have revised our FY21 earnings by 4.8% to RM165.5mil, on the back of its strong earnings momentum. In anticipation of brighter near term prospects, driven by the 5G rollout globally, electric vehicles (EVs), computing and artificial intelligence (AI), we have also raised our FY22 and FY23 earnings by 5.8% and 6.1% to RM203.0mil and RM239.9mil respectively.

• Recall that 3QFY21 revenue and core profit was up 59% and 63% respectively, despite the supply chain disruption induced by the pandemic. In addition, ViTrox cash balances stood at a healthy level of RM254mil, with low Debtto-Equity ratio (at 0.1x).

• Valuation: we have raised our target P/E to 44.4x which is 1SD above average PE of 33x for Vitrox. We think this is justifiable given the group’s technological leadership and higher market cap.

• Upgrade to HOLD. Our upgrade is premised on ViTrox for its attractive Machine Vision System (MVS) and Automated Board Inspection (ABI) products offerings, driven by innovation and strong growth potential underpinned by a significant inroad into high growth markets such as Taiwan and China, as well as management’s commitment to focus on product innovation and lead time improvements. However, we are of view that upside potential is capped given the lofty valuation, which has already stood at more than 44.4x or 1SD above its mean PE.

Source: AmInvest Research - 9 Nov 2021