INVESTMENT MERIT

We came away from VITROX briefing with our POSITIVE conviction reaffirmed by the group’s superior earnings prospects as well as management’s strategic planning and vision (comprehensive products roadmap and strategic customer engagement). While the recent 1-for-1 bonus issuance would be the sweetener, further capacity upscaling post Campus 2.0 completion is also a re-rating catalyst. Retain Trading Buy with a higher FV of RM7.16.

1Q17 results trumped expectations. The group reported 1Q17 CNP of RM19.7m (+14% QoQ; +95% YoY) which made up 28%/30% of ours and consensus’ FY17E earnings. The much stronger than expected results that has bucked the seasonally weaker trend, was driven by the strong demand from AXI segment alongside resilient orders from AOI and MVS-S segments. Note that 1Q17 revenue of RM69.6m (+9% QoQ; +24% YoY0 which was also the highest revenue ever recorded, marked as the ninth continuous growth quarter.

Full steam ahead. We believe another record-revenue (which we project to be at least 10% growth QoQ) could be in the making anchored by the robust orders from its MVS and PCA segments. Our conviction is also reinforced by the spike of its book-to-bill ratio of 1.44x in end-Mar17 (from c.1.1x parity during Jan-Feb17). For the group’s MVS segment (contributed 34% to the group’s FY16 total revenue), order backlog for its MVS-S remains strong at 258 systems (2.5 months) compared to 1Q17’s 224 systems and 2Q16’s 266 systems. Meanwhile for the growth plans, besides defending its turf by securing more orders from OEM customers as well as better customers engagement (through after sales services), the group is also exploring opportunities in Wafer Vision Inspection Solution with new products invention, an area which is seeing higher demand currently. On its MVS-T segment, while orders could be slow with weaker demand seen in Taiwan, the group is working to grow its market share beyond its existing exposures. For its lion-share ABI segment (contributed 64% to the group’s FY16 total revenue), outlook remains encouraging underpinned by solid backlog and funnel from new and existing customers. Positively, the group has also won the 3D AOI approved vendor lists (AVL) from few top EMS companies which could drive strong backlog going forward. The group will continue to focus along such direction to expand its market share.

Campus 2.0 to be ready by 4Q17. Management targeted Campus 2.0, which is located at Batu Kawan Industrial Park, to be completed by Oct/Nov17. Recall that the land size of 960k sqft with 450k sqft build up area, could potentially house four times of the current capacity. While challenges are being the limited talents to support such volume growth in the short term, we applauded the group’s vision and efforts which focus on growth and the perspective of constant new areas exploration amid comprehensive products roadmap and strategic customer engagement. For now, we only projected a conservative 2- year revenue CAGR of c.20% and we might revise our projection again should the issue of talents constraints subsided.

Maintain Trading Buy call with a higher FV of RM7.16 (from RM3.95). Post model updates, we raised our FY17E earnings by 14% to account for higher sales assumption of MVS/ABI/ECS with +2%/+29%/+0% coupled with better product mixes. We also introduced our FY18E numbers, which implied a CNP growth of 16%. All in, our TP has been raised to RM7.16 (from RM3.95) based on a rollover 18x FY18E PER. Higher PER of 18x PER is being ascribed to align with the regional’s peers forward valuation following wide sector re-rating.

Source: Kenanga Research - 23 May 2017