ViTrox’s 9M19 core net profit of RM62m (-17% 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 downgrade to SELL with a lower TP of RM6.17 after cutting projections. Our TP is derived based on higher PE multiple of 24x of FY20 EPS, in line with peers.

Below expectations. 3Q19 core net profit of RM14m (-40% QoQ, -46% YoY) brings 9M19 sum to RM62m (-17% YoY). This is a disappointment as it only forms 54% and 57% of HLIB and consensus full year estimates, respectively due to weaker-than expected top line. One-off adjustments include provisions for forex, inventory and financial instruments.

Dividend. None (3Q18: None).

QoQ. While USD/RM exchange was relatively stable, top line fell by 25% to RM67m as gain in MVS-T (+6%) was offset by the declines in ABI (-30%) and MVS-S (-34%). In turn, core net profit plunged by 40% due to diminishing operating leverage.

YoY. Turnover fell by 35% dragged by all product segments, where MVS-S -40%, ABI -39% and MVS-T -4% as customer demand waned. Subsequently, core earnings declined by 46% to RM14m on the back of less favourable product mix and weaker economies-of-scale.

YTD. Top and bottom lines moderated by 14% and 17%, respectively chiefly due to the softness in MVS product line. Stronger greenback which averaged RM4.13/USD (9M18: RM4.00/USD) did not help.

Sector outlook. SEMI posted USD2bn in billings worldwide in Sep 2019 (3-month moving average), down 2% MoM and 6% 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 Jul till Sep ratios were 0.8x, 1.0x and 1.0x, respectively.

Forecast. In view of the underperformance, we cut our FY19-21 EPS by 18%, 20% and 19%, respectively. With more than 10% downside, we downgrade to SELL with a lower TP of RM6.17, reflecting our earnings cut. However, our TP is pegged to a higher PE multiple of 24x (previously 20x), after recalibrating current valuation of global peers (see Figure #2). Despite its technology leadership, its outlook is clouded by trade tensions which delay investment decisions. MVS-S sales are highly dependent on single customer and majority of sales are non-recurring.

Source: Hong Leong Investment Bank Research - 31 Oct 2019