ViTrox’s 1H19 core net profit of RM48m (-1% YoY) missed our and consensus estimates. The moderation was mainly due the softness in MVS product line despite the favourable forex. According to SEMI, global semiconductor equipment market is projected to drop 18% to USD52.7bn in 2019 reflecting rising market uncertainty due in part to geopolitical tensions. We maintain HOLD call with a lower TP of RM6.40 after cutting projections. Our fair value is derived based on unchanged PE multiple of 20x of FY20 EPS.

Below expectations. 2Q19 core net profit of RM24m (flat QoQ, -12% YoY) brings 1H19 sum to RM48m (-1% YoY). This is a disappointment as it only forms 39% of HLIB and consensus full year estimates due to weaker-than-expected top line. One off adjustments include provisions for forex, inventory and financial instruments.

Dividend. None (2Q18: None).

QoQ. Partly boosted by the greenback appreciation (2Q19: RM4.15/USD vs. 1Q19: RM4.09/USD), top line was flat at RM89m as MVS-S (+71%) and MVS-T’s (+253%) expansions were offset by the decline in ABI (-21%). On the back of the stable margin, core net profit was also flat at RM24m.

YoY. Turnover fell by 15% dragged by MVS-S (-20%) and MVS-T (-45%) while ABI contribution was rather flat. Stronger USD did not help (2Q19: RM4.15/USD vs. 2Q18: RM3.95/USD). However, core earnings declined by a smaller quantum of 12% on the back of improved cost structure despite a higher D&A.

YTD. Top and bottom lines moderated by 2% and 1%, respectively chiefly due to the softness in MVS product line.

Sector outlook. SEMI posted USD2.1bn in billings worldwide in May 2019 (3-month moving average), up 7% MoM but down 24% YoY. Based on SEMI’s latest forecast, global sales of semiconductor manufacturing equipment by OEM is projected to drop 18% to USD52.7bn in 2019 reflecting rising market uncertainty due in part to geopolitical tensions.

Book-to-bill. Recovered above parity where April till June ratios of 1.1x, 1.1x and 1.0x, respectively.

Forecast. In view of the underperformance, we cut our FY19-21 EPS by 6%, 4% and 4%, respectively.

Maintain HOLD with a lower fair value of RM6.40 (previously RM6.68), reflecting our earnings downgrade. 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 Jul 2019