· A leading automated vision inspection systems and equipment supplier serving the global semiconductor and electronic packaging industries. ViTrox Corporation Berhad (VITROX) designs and manufactures innovative, leading-edge and cost-effective automated vision inspection equipment and system-on-chip embedded electronics devices for the Outsourced Assembly and Test (OSAT) companies, printed circuit board (PCB) manufacturers, electronics assemblies companies, Original Equipment Manufacturers (OEM), Original Design Manufacturers (ODM), Electronics Manufacturing Services (EMS) providers and Contract Manufacturers (CM) around the world. It is well recognized as one of the world-leading automated machine vision inspection solution providers with an extensive customer base in Malaysia, Singapore, Indonesia, Thailand, Vietnam, Philippines, Taiwan, China, Japan, Korea, India, Australia, Europe, Brazil, Mexico, the USA and more.

· Healthy outlook of equipment spending and semiconductor sales to bode well for VITROX. Looking at a macro perspective, the worldwide equipment sales are expected to register a decent growth of 15% in 2015 by SEMI, alongside with the healthy global semiconductor sales forecasts (of mid-high single digit growth) by both SIA and WSTS, even from a high base in 2014. The growth will be underpinned by the surging demand in Smartphones, followed by Big Data as well as Internet of Things (IoT). All these drivers, in turn, will boost high volume and increase complexity of semiconductor packages and PCBA, which required enormous inspections to ensure good quality and high productivity. We believe VITROX, being the leading automated vision inspection equipment supplier which is positioned in the front-end of semiconductor value chain, is positioned well to ride on the surging wave of these rising trends. Our positive view is also further reaffirmed by the management’s confidence of achieving “double-digit” growth in its FY15E revenue, even from a high base in FY14 (at +60%). In terms of outlook for 1Q15, the group expects revenue to hit the range of RM32-36m or implies 15%-17% of our FY15E revenue (having considered the seasonality weakness), mainly on the back of healthy order backlog of RM18m and book-to-bill ratio of 1.05x. Recall that the group’s FY1Q revenues in FY12-14 were hovering at 10-13% of the full year revenue. Meanwhile, margins are expected to be stable, if not to the positive side, considering the strong USD trend.

· Capacity expansion - ViTrox Campus 2.0 to cater for the future growth. The group had recently acquired a land at Batu Kawan Industrial Park for a total consideration of RM34.2m, to be developed as a new facility (named as ViTrox Campus 2.0). Management mentioned that a 3-phase expansion plan will be carried out and expected to be fully completed by 2023. The construction of Phase 1 will start in early 2H2015 and scheduled to be completed by early 2017. Meanwhile on the earnings forecast, the group envisaged to generate revenue of c.RM900m by 2020. We are sanguine on the expansionary move as we opined that the plan came in just in time considering the rising Big Data and IoT era.

· Strong balance sheet and healthy cash flow to support its dividend yield. The group is at a zero gearing position with strong net cash of RM56.0m as of Dec 2014. Historically, VITROX has been consistently paying out >20% of their earnings as dividends, though its dividend payout policy is only 20% of NP. With the strong balance sheet as well as the good track record of dividend payout of 20% during the industry upcycle, we believe that the group could offer up to FY15E/FY1615E DPS of 5.1sen/5.8sen, translating into a dividend yield of 1.6%- 1.8% (based on conservative DPR of 20%).

· Trading Buy with a Fair Value of RM3.84. Besides the abovementioned investment merits, VITROX is also the net beneficiary from the appreciating USD (80% of its revenue quoted in US), with natural hedging on its raw materials purchases (at c.30% of COGS). All in, we are projecting the group to grow at a 2- year NP CAGR of 17% to register FY15E/FY16E NPs of RM59.5m/RM67.1m based on: (i) a conservative 2-year revenue CAGR of 16% (management indicated a double-digit revenue growth), (ii) EBIT margin of 28.7%/29.6% for FY15/FY16 (5-year average at 29%), and (iii) MYR/USD assumption of RM3.57/RM3.50 in FY15/FY16. By ascribing a targeted FY15 PER of 15x, which is broadly in line with the average forward PER of its global peers, on our forecasted EPS of 25.6 sen, the indicative FV is RM3.84, which could offer 18.3% upside potential on top of a net yield of 1.6%.

Source: Kenanga