FY22 core net profit of RM205m (+19% YoY) beat our/street estimates at 106%, respectively. The deviation was higher-than-expected adjusted EBITDA margin. Bill-to-book ratio fell below parity and ended 4Q22 at 0.9x. It anticipates softer global economic growth and uncertainty in general business outlook in 1H23. ViTrox will put more emphasis on long-term growth strategies while preparing for a temporary downturn. However, ViTrox is optimistic on the business prospect for 2H23 thanks to its well-diversified revenue base and exposure to high-growth industries. Reiterate HOLD with a higher TP of RM7.62. We opine that its risk reward profile is fair at current juncture.

Exceeded expectations. All-time high 4Q22 core net profit of RM63m (+41% QoQ, +37% YoY) brought FY22’s to RM205m (+19% YoY), which beat HLIB and consensus full year forecasts at 106%. The deviation was higher-than-expected adjusted EBITDA margin. FY22 one-off items include fair value losses on financial instruments (+RM4.6m), net forex gain (-RM6.0m), impairment loss on financial assets (+RM6.4m), net inventories written down (+RM4.6m), amortization of deferred income (-RM25k), fair value gain on investment properties (-RM4.0m) and gain on PPE disposal (-RM745k).

Dividend. None (4Q21: None).

QoQ. Aided by the favourable forex (4Q22: RM4.56/USD vs 3Q22: RM4.48/USD), top line gained 2% to RM190m as the strength in ABI (+11%) was more than sufficient to offset the declines in MVS-S (-21%), MVS-T (-12%) and ECS (-56%). In turn, core net profit jumped 41% to RM63m mainly attributable to higher adjusted EBITDA margin and higher interest income.

YoY. Supported by the stronger greenback (4Q21: RM4.18/USD), turnover increased 2% driven solely by ABI growth (+24%), more than sufficient to offset the contractions in MVS-S (-29%), MVS-T (-35%) and ECS (-43%). Despite the higher D&A (+35%), core earnings gained by 37% thanks to favourable product mix, higher interest income and lower effective corporate tax rate.

YTD. Turnover was 10% higher at RM750m and yielded 19% growth in core earnings as adjusted EBITDA margin expanded. Breakdown of sales growth: MVS-S (-20%), MVS-T (-20%), ABI (+39%) and ECS (-61%).

Book-to-bill ratio fell below parity and ended 4Q22 at 0.9x.

Outlook. ViTrox anticipates softer global economic growth and uncertainty in general business outlook in 1H23. It will put more emphasis on long-term growth strategies while preparing for a temporary downturn. The 10-year expansion master plan (2021- 2030) in Batu Kawan is expected to further strengthen manufacturing and R&D facilities. Nevertheless, ViTrox is optimistic on the business prospect for 2H23 thanks to its well-diversified revenue base and exposure to high-growth industries.

Forecast. After tweaking our assumptions based on the deviation mentioned above, FY23-24 core net profit are revised by +5% and +9%, respectively.

Reiterate HOLD with a higher TP of RM7.62 (from RM7.24), reflecting the upward earnings revision. 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 - 24 Feb 2023