Investment Highlights

• We upgrade our recommendation to BUY from HOLD on ViTrox Corp (ViTrox) with a higher fair value of RM9.89/share (from RM8.37/share). This is pegged to a revised FY23F PE of 36x, representing an adjusted 3-year average forward PE, from an earlier 33x. We ascribe a 4-star ESG rating to ViTrox, which further adds a 3% premium to our valuation (Exhibit 5).

• Our FY22F–23F earnings are unchanged despite lower sales contributions expected from its machine vision system (MVS) for 2QFY22 as guided by management, as we believe the slower growth in China will be offset by other regions, particularly from the group’s automated board inspection (ABI) segment. As at 3 Apr 2022, ViTrox’s ABI funnel has grown to RM254mil (from RM237mil in February), supported by growing segments in telecommunication, automotive and computing.

• However, we’ve raise our FY24F earnings by 5% on the back of the group’s focus on manufacturing AI-enabled machines, which support higher ASP and margin. We have also considered ViTrox’s capacity expansion with its new facility, which will add 30K sqft of production floor space by 2HFY23F.

• Here are the key takeaways from its 1QFY22 investors briefing:
  • ViTrox recorded its highest 1Q revenue, mainly led by growth in overseas markets, which saw an increase of 66% YoY to RM146mil. Within the overseas market, Mexico and the US contributed the strongest growth at 3.4x and 2.1x YoY. The local market, on the other hand, shrank 6% YoY to RM39mil, as the group faced stiff competition on talent retention.
  • In terms of product segment, its ABI segment surged 73% YoY to RM104mil. Within ABI, ViTrox managed to deliver a record 102 units of advanced 3D optical inspection machines, a significant jump from 45 units a year ago.
  • Similarly under ABI, only 34 units of advanced 3D X-ray inspection (AXI) machines were being delivered compared to 54 units last quarter as key materials such as motion controller and drivers continue to face shortages. Nevertheless, management was able to secure sufficient raw materials for the April and May production, and we expect AXI machine sales to ramp up in the coming quarter.
  • For the MVS, revenue surged 22% YoY to RM81mil, as demand continued to be strong from the automotive industry. Moving into 2QFY22, the group expects weaker sales as demand from China slows down amid rising Covid- 19 cases. Management has guided revenue for the MVS segment to range between RM54mil and RM60mil compared to RM94mil in 2QFY21.
• Facing material shortages which resulted in higher raw material prices, the group has strategically increased its selling prices to mitigate margin erosion. In an effort to increase ASP in the long run, the group places its focus on value-adding features such as AI and IR 4.0 capabilities to its products, complemented by its V-One data analytic platform. Currently, at least 10% of ViTrox’s machines contain AI capabilities.

• ViTrox’s headwinds continue to be talent and supply shortages and ongoing lockdowns in China as local regulators remain firm on the country’s zero-Covid policy. However, we remain optimistic on the group’s capabilities to overcome the constraints as it has demonstrated since the beginning of the pandemic.

• We continue to like ViTrox for its attractive ABI and MVS product offerings, with a strong focus on developing AI capabilities. Along with its V-One data analytic platform, we believe that this will create a whole manufacturing ecosystem to attract new customers while retain existing ones. Prospects are further enhanced by the group’s diversified sales in terms of geographical region, and its continuous effort to reduce customers’ concentration.

• As such, we opine that ViTrox’s forward PE of 36x (vs. >40x over the past 2 years) is justifiable and view that there is further upside as the current weak sentiment in the technology sector offers an opportunity to accumulate the stock.

Source: AmInvest Research - 29 Apr 2022