ViTrox’s 1H20 core net profit of RM44m (-9% YoY) missed our and consensus estimates. The underperformance was mainly due the weaknesses in ABI and MVS-S though these were partly cushioned by the strength in MVS -T. ViTrox shared that it has yet to see any significant impact due to Covid-19 outbreak and will focus on cost savings as well as business development initiatives. We reduce our earnings forecasts and this has led to lower TP of RM7.17, pegged to 30x of FY21 EPS. Maintain SELL.

Below expectations. 2Q20 core net profit of RM23m (+13% QoQ, -4% YoY) brought 1H20’s to RM44m (-9% YoY) which miss expectations, only accounted for 40% and 41% of HLIB and street full year estimates, respectively due to weaker-than-expected EBITDA margin. 2Q20 one-off adjustments include net forex loss (RM148k), net inventories written down (RM0.8m), gain on PPE disposal (-RM0.7m), impairment gains on financial assets (RM0.2m) and amortization of deferred income (-RM0.2m).

Dividend. None (2Q19: None).

QoQ. Partly aided by stronger USD/RM (2Q20: RM4.32/USD vs 1Q20: RM4.17/USD), top line gained by 7% to RM97m as the decline in ABI (-13%) was sufficiently offset by the gains from MVS-S (+31%), MVS-T (+51%) and ECS (+3%). In turn, core net profit gained by 13% mainly due to better economies of scale, lower D&A and effective corporate tax rate.

YoY. Also aided by the stronger USD (2Q20: RM4.32/USD vs 2Q19: RM4.15/USD), turnover inched up by 8% driven by MVS-T (+154%) and ECS (+126%), more than sufficient to offset the contractions in ABI (-14%) and MVS-S (-28%). Filtered down, core earnings declined by 4% to RM23m as less favourable product mix yielded lower EBITDA margin (-4.5pt).

YTD. For the same reasons above, top lines gained +5% (MVST-S: +231%, ECS: +90%, MVS-S: -19% and ABI: -19%) while bottom lines fell -9%, respectively.

Book-to-bill. Ended 2Q20 With 1.1x.

Outlook. SEMI posted a preliminary USD2.3bn in worldwide billings for May 2020 (3- month moving average), +3% MoM and +13% YoY. ViTrox shared that so far it has not experienced significant downward impact due to Covid-19 thanks to its diversified business model, serving multiple industries and presence in more than 30 countries. It will take more stringent and prudent cost control measures to stay competitive and resilient. Besides, it will continue to focus on market expansions, client relationship building and product innovation to grow the business further.

Forecast. Based on the deviations mentioned above, we cut our FY20-22 EPS by 13%, 15% and 15%, respectively.

Reiterate SELL with a lower TP of RM7.17 (from RM8.43), reflecting our earnings cut. Our TP is pegged to unchanged PE multiple of 30x of FY21 EPS. Despite its technology leadership, its outlook is clouded by revived trade tension risk and Covid- 19 pandemic impact which may delay investment decisions and billings. MVS-S sales are highly dependent on single customer and majority of its sales are non-recurring.

Source: Hong Leong Investment Bank Research - 24 Jul 2020