ViTrox’s 1H22 core net profit of RM97m (+18% YoY) was below ours but matched consensus. The deviations were lower-than-expected revenue and margins. Bill-to-book remained healthy at 1.1x at the end of 2Q22. The effort in continuous innovation of new products coupled with its relentless efforts in market expansion activities have successfully broaden customer base. Reiterate BUY with a lower TP of RM8.60. We opine that global CM/EMS’ large scale relocation, expansion and order diversion activities will create an insatiable demand for its products.

Below expectation. 2Q22 core net profit of RM48m (-4% QoQ, -8% YoY) brought 1H22’s to RM97m (+18% YoY), which missed HLIB full year forecast at 45% but matched consensus at 49%. The deviations were lower-than-expected revenue and margins. 1H22 one-off items include fair value losses on financial instruments (+RM3.3m), net forex gain (-RM7.8m), impairment loss on financial assets (+RM947k), net inventories written down (-RM123k), amortization of deferred income (-RM9k) and gain on PPE disposal (-RM745k).

Dividend. None (2Q21: None).

QoQ. Partly aided by favourable forex (2Q22: RM4.34/USD vs 1Q22: RM4.19/USD), top line gained 2% to RM189m led by ECS (+67%), followed by ABI (+20%) more than sufficient to offset the weaknesses in MVS-S (-44%) and MVS-T (-8%). In turn, core net profit lost 4% to RM48m mainly attributable to positive corporate effective tax effect in 1Q22.

YoY. Despite the stronger greenback (2Q21: RM4.13/USD), turnover declined 4% driven by ECS (-61%), MVS-S (-44%) and MVS-T (-28%), more than sufficient to offset the growth in ABI (+27%). Core earnings fell by 8% on the back of higher D&A (+40%).

YTD. Turnover was 15% higher at RM375m and yielded 18% growth in core earnings as EBITDA margin added +1.3ppt.

Book-to-bill remained healthy above parity at 1.1x at the end of 2Q22.

Outlook. ViTrox is cautiously optimistic in achieving healthy growth in 2H22. The effort in continuous innovation of new products coupled with its relentless efforts in market expansion activities have successfully broaden customer base, specifically in the automotive, telecommunication infrastructure and higher performance computer segments. The strategy in securing critical parts has also smoothen the supply chain and the material shortage issue is being resolved towards 2H22.

Forecast. After tweaking our assumptions based on the deviations mentioned above, FY22-24 core net profit are revised by -6%, -7% and -7%, respectively. Reiterate BUY with a lower TP of RM8.60 (from RM9.21) based on PE multiple of 34x of FY23 EPS. 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 - 29 Jul 2022