KUALA LUMPUR (July 3): ViTrox Corp Bhd (KL:VITROX) will grapple with the challenging industry outlook, even as profits may improve in the second quarter of 2024, Maybank Investment Bank (Maybank IB) flagged and told investors to now sell the stock.

The machine vision system segment faces headwinds from capacity constraints, slower pace of end-markets recovery, and intensifying competition, Maybank IB said. Slowdown by key customers, meanwhile, weighs on Vitrox’s automated board inspection business, the research house noted.

Automated test equipment market in China, ViTrox’s largest geographical market, has “structurally shifted in recent quarters” from China’s aggressive push for technology self-sufficiency, Maybank IB said. That spells risk of market share loss for Vitrox and margin pressure to defend their position, it warned.

There were already signs of stress in the first three months of 2024 (1QFY2024), as Vitrox’s net profit nearly halved, which the company said was due to unfavourable product mix and higher research and development expenditures to support the introduction of new products.

Shares of Vitrox have risen 15% so far this year, tracking a rally in the technology sector, as investors bet on a global industry upcycle. Analysts, however, are now divided over prospects of further gain in share prices.

Following Maybank IB’s downgrade on Wednesday, there are now three "sell’"and three "hold" calls, and six "buy" recommendations. The consensus’ 12-month target price is RM4.18, according to Bloomberg. Vitrox was trading at RM4.19 at 11am on Wednesday.

Maybank IB also cut its target price to RM3.40, from RM3.95, after slashing its earnings forecast for financial years ending Dec 2024 (FY2024) by 20%. The house now expects the company to report a core net profit of RM160 million, compared to consensus estimate for RM155 million for FY2024.

Further, Vitrox’s valuations are “rich” at 46 times its forward earnings, based on 17% average annual growth over the next three years, Maybank IB said. “Aggressive monetary policy will have an adverse impact on the tech sector that tends to have rich valuations,” the house said.

“While we continue to like ViTrox for its strong management team and diversified exposure to key high-growth industries, we downgrade our call to 'sell', as valuations are rich,” Maybank IB added.

Vitrox’s FY2023 net profit fell 36% to RM128.3 million, as revenue declined 23.4% to RM574.92 million, which the company blamed on the market slowdown that affected demand for both its automated board inspection services and machine vision system business.