ViTrox’s 9M22 core net profit of RM142m (+13% YoY) was below our and street estimates. The deviations were lower-than-expected adjusted EBITDA margin. Bill-to-book ratio remained healthy at 1.0x at the end of 3Q22. Telecommunication infrastructure and automotive segments are expected to stay robust while consumer electronic segment is forecasted to remain soft as a result of cautious spending and inventory adjustment. Downgrade to HOLD with a lower TP of RM7.24. Although ViTrox’s technology leadership and asset light business model will continue to drive growth going forward, we opine that its risk reward profile is fair at current juncture.

Below expectations. 3Q22 core net profit of RM45m (-6% QoQ, +4% YoY) brought 9M22’s to RM142m (+13% YoY), which missed HLIB/consensus full year forecast at 70%/71%. The deviations was lower-than-expected adjusted EBITDA margin. 9M22 one-off items include fair value losses on financial instruments (+RM7.5m), net forex gain (-RM19.3m), impairment loss on financial assets (+RM1.1m), net inventories written down (+RM1.6m), amortization of deferred income (-RM13k) and gain on PPE disposal (-RM745k).

Dividend. None (3Q21: None).

QoQ. Despite the favourable forex (3Q22: RM4.48/USD vs 2Q22: RM4.34/USD), top line lost 2% to RM186m as the weakness in MVS-T (-24%) was more than sufficient to offset the strengths in MVS-S (+16%), ABI (+3%) and ECS (+20%). In turn, core net profit fell 6% to RM45m mainly attributable to lower adjusted EBITDA margin and higher effective tax rate.

YoY. Partly aided by the stronger greenback (3Q21: RM4.19/USD), turnover increased 10% driven solely by ABI expansion (+48%), more than sufficient to offset the declines in MVS-S (-34%), MVS-T (-25%) and ECS (-63%). Despite the higher D&A (+38%), core earnings gained by 4% thanks to favourable product mix.

YTD. Turnover was 13% higher at RM560m and yielded 13% growth in core earnings as EBITDA margin added +1.7ppt. Breakdown of sales growth: MVS-S (-18%), MVS T (-16%), ABI (+46%) and ECS (-63%).

Book-to-bill ratio remained healthy at 1.0x at the end of 3Q22.

Outlook. ViTrox anticipates that the recent inflation and geopolitical tensions will lead to uncertainties in market demand. Telecommunication infrastructure and automotive segments are expected to stay robust while consumer electronic segment is forecasted to remain soft as a result of cautious spending and inventory adjustment. Overall, it is optimistic that it will continue to achieve satisfactory financial results for FY22.

Forecast. After tweaking our assumptions based on the deviations mentioned above, FY22-24 core net profit are revised by -5%, -16% and -17%, respectively.

Downgrade from Buy to HOLD on the back of a lower TP of RM7.24 (from RM8.60), reflecting the earnings cut. Our TP is derived based on unchanged 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. Although ViTrox’s technology leadership and asset-light business model will continue to drive growth going forward, we opine that its risk reward profile is fair at current juncture.

Source: Hong Leong Investment Bank Research - 28 Oct 2022