ViTrox’s 1Q22 core net profit of RM49m (+7% QoQ, +60% YoY) was in line. This was the second highest quarter core earnings in ViTrox’s history. Bill-to-book remained healthy at 1.1x at the end of 1Q22. It is optimistic on FY22 business prospect. In order to stay vigilant and resilient, it is taking appropriate counter measures to overcome the barrier faced on material shortages and logistics constraints. Reiterate BUY with a lower TP of RM9.21. We opine that global CM/EMS’ large scale relocation, expansion and order diversion activities will create an insatiable demand for its products.

Within expectations. 1Q22 core net profit of RM49m (+7% QoQ, +60% YoY) matched HLIB and consensus expectations, accounting for 23% and 25% of full year forecasts, respectively. This was the second highest quarter core earnings in ViTrox’s history. 1Q22 one-off items include net forex gain (-RM1.16m), net inventories written down (-RM123k), amortization of deferred income (-RM3k), gain on PPE disposal (- RM145k) and impairment losses on financial assets (+RM798k).

Dividend. None (1Q21: None).

QoQ. While forex was relatively stable (1Q22: RM4.19/USD vs 4Q21: RM4.18/USD), top line was flattish at RM185m led by MVS-S (+39%), followed by MVS-T (+6%) more than sufficient to offset the weaknesses in ABI (-10%) and ECS (-36%). However, core net profit gained at a quicker pace of 7% to RM49m mainly attributable to positive corporate effective tax effect.

YoY. Partly boosted by stronger greenback (1Q21: RM4.06/USD), turnover gained 43% driven by ABI (+73%), MVS-S (+42%) and MVS-T (+10%), more than sufficient to offset the decline in ECS (-69%). Despite the higher D&A, core earnings accelerated by 60% on the back of improved EBITDA margin (+1.1ppt) and positive corporate effective tax rate.

Book-to-bill remained healthy above parity at 1.1x at the end of 1Q22.

Outlook. Despite the headwinds anticipated from the global supply chain disruption as a results of global material shortage coupled with the lockdowns in China due to new outbreak of Covid-19 cases, ViTrox is optimistic on the business prospect for FY22. The sales growth momentum for the ABI equipment will remain robust as the demands from wireless communication, automotive and IoT are expected to persist. In order to stay vigilant and resilient, it is taking appropriate counter measures to overcome the barrier faced on material shortages and logistics constraints. In order to cater for sustainable business growth for year 2022 and beyond, the Group has commenced its expansion projects in Batu Kawan.

Forecast. After updating our model based on FY21 audited numbers, FY22-23 core net profit are revised by -3% and -1%, respectively. At the same time, we introduce FY24 projection.

Reiterate BUY with a lower TP of RM9.21 (from RM11.28) based on PE multiple of 34x (previously 48x) of FY23 EPS (previously FY22 EPS). Considering US Fed’s hawkish stance to tame inflationary economy, we lower ViTrox’s PE valuation to its 5- year PE mean of 24x (see Figure #2). We opine that global CM/EMS’ large scale relocation, expansion and order diversion activities will create an insatiable demand for its products. ViTrox’s technology leadership and asset-light business model will continue to drive growth going forward.

Source: Hong Leong Investment Bank Research - 28 Apr 2022