Investment Highlights

• We maintain our HOLD recommendation on ViTrox Corp (ViTrox) with an increased fair value (FV) of RM8.37/share (previously RM7.45/share). Our FV is now pegged to a rolled forward FY23F PE of 33x, a 25% premium to peers to reflect higher market capitalisation and above-average margins. We ascribe a 4-star ESG rating to ViTrox, which translate to a 3% premium to our valuation (Exhibit 5).

• Our forecasts are maintained with expectations that ViTrox’s FY22F sales growth momentum will continue, albeit at a slower growth rate of 21% vs 45% in a stellar FY21 revenue of RM680mil.

• We assume 75% of the group’s FY22F sales to derive from overseas and the remaining 25% local. China will continue to be ViTrox’s top line contributor (33% in FY21) as the nation pledged to meet 70% of its semiconductor needs through domestic supply chains, boosting short-term demand for machine, parts and equipment.

• On the local front, the semiconductor landscape continues to be supported by the sector’s expansion plans. Evidently, Intel will be investing US$7bil for new chip-packaging and testing factory in Malaysia to address the global shortage of semiconductors.

• While the new facility is not expected to begin production until 2024, we view that local ATE players will stand to benefit the most through direct machinery sales or support services.

• For 1QFY22, management guided that the expected revenue for its Machine Vision System (MVS) and Automated Board Inspection (ABI) to range between RM156mil to RM187mil.

• We conservatively assume the group to book in at the lower end of RM160mil as material shortages remain a key hurdle to ViTrox. Nonetheless, we maintain FY22F revenue of RM826mil given that demand for first quarters are historically lower due to the holiday season in China.

• ViTrox’s key risks continue to be material shortages, which management admitted to buying components from the more expensive open market. The group have extended its stock buffer to up to 9 months from the previous low of 3 months. Furthermore, a talent shortage continue to affect the timeline of new product introductions.

• Despite these headwinds, FY21 net profit margin improved 3% points to a commendable 25% from effective cost control and appreciating US dollar. As a comparison, Pentamaster and MI Technovation FY21 net profit margins were 14% and 17%.

• We continue to like ViTrox premised on its attractive ABI and MVS product offerings, propelled by the advancement in technology such as Industry 4.0, electric/autonomous vehicles and the deployment of 5G network infrastructure.

• Prospects are further brightened by the group’s diversification efforts 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 the view that the upside potential is capped given lofty PE valuations of 45x currently, 36% above its FY23F PE.

Source: AmInvest Research - 6 Apr 2022