ViTrox Corp (VITRO MK; BUY; TP: MYR7.20)

ViTrox Corp (VITRO MK; BUY; TP: MYR7.20)

• Results trounced expectations. Despite a seasonally soft quarter, 1Q17 revenue hit a record high at MYR70m while core net profit of MYR19m came in at 30% of our and consensus full-year forecasts. Strong demand in its AXI division prompts our 23%-48% FY17-19 profit upgrade. Campus 2.0 completion (3x current floor space) by 3Q17 would ease current floor space constraint, offering further scaling up opportunities. BUY with a higher MYR7.20 TP (+53%) as we peg ViTrox to 18x CY18 PER (from 14.5x), in line with regional peers.
• Nine consecutive quarters of QoQ growth in revenue. 1Q17 revenue hit a record high at MYR70m (+9% QoQ, +24% YoY; previous high was MYR65m in 2Q14), extending its QoQ revenue growth streak to nine consecutive quarters. Growth driver was the AXI division whereby strong demand (~20 units/quarter) sustained for the fourth consecutive quarter alongside higher ASPs. We also note that group operating margin has been steady, averaging 28% for the last five quarters. The slight QoQ contraction in 1Q17 core net profit (-3%) was largely due to higher taxes.
• A sign of more greatness to unfold? Typically, in the past four years, 1Q revenue had been the weakest for ViTrox. 1Q17 however positively surprised. Coupled with a surge in its end-Mar 2017 book-to-bill ratio to 1.44x, these could point towards more record-breaking revenue in the sequential quarters. Incorporating (i) a higher USD/MYR of 4.30 (from 4.20), (ii) the strong 1Q17 and (iii) higher sequential demand for AXI, MVSS and ECS (refer to Table 2 overleaf), we raise our FY17/18/19 core net profit forecasts by 23%/48%/39%. Its 1-for-1 bonus issue should also enhance the stocks liquidity.
• Regional peers have re-rated. On the back of a strong 1Q17 and rising optimism, equipment players regionally have re-rated (double-digit share price gain YTD for most) and are now trading at an average of 18x CY18 PER. As a leading global automated inspection equipment specialist with key expertise in X-ray inspection (serving >150 global EMS and semiconductor players), we believe that ViTrox is on par excellence with world-class equipment players and deserves to trade at similar valuations.