ViTrox’s 9M20 core net profit of RM74m (+19% YoY) matched ours but missed consensus estimate. Top line growth was attributable to higher contributions from all product lines leading to bottom line improvement on the back of higher efficiency. It 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. While forecasts are unchanged, we lift its PE multiple to 38x resulting higher TP of RM12.43. Maintain HOLD. Although its technology leadership and asset-light business model will continue to drive growth going forward, its risk reward profile looks balanced at this juncture.

In line with HLIB but below street. 3Q20 core net profit of RM31m (+33% QoQ, +113% YoY) brought 9M20’s to RM74m (+19% YoY) which matched our full year forecast at 74% but below consensus accounting for 71%. 3Q20 one-off items include net forex loss (RM577k), net inventories written down (RM701k), gain on PPE disposal (-RM58k), impairment gains on financial assets (-RM24k), amortization of deferred income (-RM169k) and PPE written off (RM3k).

Dividend. None (3Q19: None).

QoQ. Despite the weaker USD/RM (3Q20: RM4.20/USD vs 2Q20: RM4.32/USD), top line gained by 28% to RM124m led by MVS-S (+68%), ABI (+35%) and MVS-T (+6%), more than sufficient to offset the decline in ECS (-20%). In turn, core net profit gained 33% mainly due to better economies of scale although effective corporate tax rate was higher at 5.7% vs 2Q20’s 3.4%.

YoY. Also aided by the stronger USD (3Q20: RM4.20/USD vs 3Q19: RM4.16/USD), turnover swelled by 86% driven by all product lines where MVS-T (+155%), MVS-S (+83%), ABI (+66%) and ECS (+34%). Filtered down, core earnings expanded by 113% to RM31m on the back of improved operating leverage and lower D&A (-17%).

YTD. For the same reasons above, top and bottom lines gained +27% (MVS-T: +196%, ECS: +70%, MVS-S: +11% and ABI: +1%) and 19%, respectively.

Book-to-bill. Ended 3Q20 With 1.1x.

Outlook. SEMI posted a preliminary USD2.7bn in worldwide billings for Aug 2020 (3- month moving average), +3% MoM and +33% 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. Unchanged as Results Are Within Expectation.

Reiterate HOLD with a higher TP of RM12.43 (from RM11.45) after lifting our PE multiple from 35x to 38x, pegged to mid-FY22 EPS. We opine that global CM/EMS’ large scale relocation, expansion and order diversions activities will create a big demand for its products. Although its technology leadership and asset-light business model will continue to drive growth going forward, its risk reward profile looks balanced at this juncture.

Source: Hong Leong Investment Bank Research - 23 Oct 2020