Investment Highlights

• We upgrade our call on ViTrox Corp (ViTrox) to BUY from HOLD with an unchanged FV of RM8.40/share based on a higher PE of 41x (from 36x), +1 std deviation above the 5- year mean of 32x on a revised FY24F EPS. The higher PE is premised on our anticipation of a continued gradual recovery for the semiconductor industry in FY24. We ascribe an unchanged 4-star ESG rating which incorporates a 3% premium to our valuation (Exhibit 4).

• We lower our FY23-FY25F earnings by 12% for each year, assuming more conservative sales estimates, after the group’s 9MFY23 results fell short of expectation. 9MFY23 core net profit of RM108mil only accounted for 64% of both our and consensus FY23F projection.

• YoY, 9MFY23 revenue slipped by 23%, mainly attributed to lower demand from machine vision system (MVS) and automated board inspection (ABI) segments as a result of the global economic slowdown and slower recovery in the semiconductor industry. 9MFY23 core net profit declined by 33% YoY in tandem with lower revenue and EBITDA margin decline of 200bps to 28%.

• QoQ, revenue in 3QFY23 was flattish. However, 3QFY23 core net profit rose by 21%, which we believe is likely due to a better product mix.

• Despite the weaker reported earnings, we are comforted by the group's well-diversified revenue base and its exposure to high-growth industries such as computing, telecommunication and automotive segments, which are its bright spots. We anticipate a gradual recovery and stronger demand in 1QFY24 from Automated Board Inspection (ABI) and Machine Vision System (MVS) segments compared to 2HFY23.

• Additionally, ViTrox's geographical diversity may play a crucial role in capturing new customers arising from trade diversion due to the US-China chip war, particularly in Mexico and the ASEAN region.

• From a valuation perspective, the stock currently trades at an attractive FY24F PE of 36x vs its 5-year peak of over 66x.

Source: AmInvest Research - 27 Oct 2023