ViTrox’s 1Q19 core net profit of RM24m (-18% QoQ, +14% YoY) missed our and consensus estimates. The sequential moderation was mainly due to seasonal weakness, unfavourable forex and MVS-T’s drag. According to SEMI, global semiconductor equipment market is staged for a reset in 2019 with an expected slowdown of 4%. We maintain HOLD call with a lower TP of RM6.68 after cutting projections as well as rolling over valuation. Our fair value is derived based on unchanged PE multiple of 20x of FY20 EPS.

Below expectations. 1Q19 revenue of RM89m (above guidance by 2%) translated into a disappointing core net profit of RM24m, accounting for 15% and 18% of our and consensus full year forecasts, respectively.

Dividend. None (1Q18: None).

QoQ. Top line was lower by 20% weighed down by seasonal weakness, unfavourable forex (1Q19: RM4.09/USD vs. 4Q18: RM4.17/USD) and the dismal showing of MVS which declined 55%. After one-off adjustments, core net profit weakened by 18% as lower volume hampered operating leverage.

YoY. Partly boosted by the greenback appreciation (1Q19: RM4.09/USD vs. 4Q18: RM3.92/USD), turnover saw a gain of 15% as ABI’s 37% growth outweighed the MVS’ 33% decline. The increase in ABI was mainly due to higher demand from wider customer base. In turn, core earnings expanded by 14% on the back of better economies-of-scale despite a higher D&A.

Sector outlook. SEMI posted USD1.8bn in billings worldwide in Mar 2019 (3-month average basis), down 2% MoM and 25% YoY. According to SEMI’s latest report, global semiconductor equipment market is staged for a reset in 2019 with 4% contraction before expanding strongly in 2020 by 21% to reach all-time high of USD72bn.

Book-to-bill. ViTrox’s Jan-Mar book-to-bill ratio has been uninspiring with 0.8x, 0.7x and 0.8x, respectively. Based on our record since Nov 2015, this is the first time these data points fall below parity and they may imply weaknesses ahead.

Forecast. In view of the underperformed 1Q19 results, we cut our FY19-20 EPS by 20% and 15%, respectively. FY21 projections are also introduced. Maintain HOLD with a lower fair value of RM6.68 (previously RM6.72), reflecting our earnings downgrade as well as rolled over valuation. Our TP is derived based on unchanged PE multiple of 20x of FY20 EPS. ViTrox is poised to win more market share in the advent of global semiconductor growth leveraging on its technology leadership in machine inspection, especially in 3D-AOI and AXI. However, MVS-S sales are highly dependent on single customer and majority of sales are non recurring.

Source: Hong Leong Investment Bank Research - 26 Apr 2019