FW: Update: ViTrox Corp (VITRO MK; BUY; TP: MYR6.50) - And the race begins.

 

 

Good morning,

 

Exciting times! ViTrox has moved into its new Campus 2.0 (finally!), in time to capture demand from 5G deployment. Upgrade to BUY.

 

Update: ViTrox Corp (VITRO MK; BUY; TP: MYR6.50) - And the race begins…

• Unleashing its new production capacity. ViTrox’s official move into Campus 2.0 in July 2018 (3x Campus 1.0 floor space) is in time to capture rising demand for automation equipment, especially in the (i) telecommunication infrastructure (5G adoption) and (ii) automotive (autonomous driving) industries; these segments make up ~56%/35% of ViTrox’ ABI/Group revenue. We raise our FY18-20 earnings forecasts by 7%-13% on higher ABI sales volume. We now peg ViTrox at 22x CY19 PER (from 19x) as we ascribe a higher valuation premium of 30% (20% previously) to ViTrox against peer valuations for its superior growth prospects. 22x PER also translates to 1SD above its historical mean. Our TP is raised to MYR6.50 (+30%); upgrade to BUY. 
• 5G deployment as early as end-2018. The standardisation of 5G network is expected in 2H18 with commercial deployment in several key markets (i.e. US, Japan and China) as early as end-2018; mobile telecommunication operators in US have announced launches of 5G network between end-2018 to mid-2019. With aggressive adoption expected over the next 5-7 years, we expect stronger capital investments by both (i) telco infrastructure and (ii) mobile devices component players concurrently. We expect the automation equipment players to be the first to benefit from capex spending by these component players in view of a production ramp up, likely in 2019.
• Book-to-bill ratio rises – a positive indication. Aggressive capacity expansion (3x floor space expansion), alongside swelling book-to-bill ratio (now up to 1.3x as at end-June 2018), suggest that ViTrox’s upcoming quarterly turnover level may well approach or beat its highest (MYR96m in 4Q17). Breaching the MYR100m level for revenue per quarter consistently will be symbolic, potentially unlocking another level of operational scale, translating to higher profitability. Our revised earnings forecasts assumes only 55%/40% utilisation of ViTrox’s capacity in 2018/2019 (refer to Table 5).

• This segment bellwether deserves a premium. In comparison to other local automation equipment players, ViTrox arguably has the largest exposure to the telecommunications and automotive industry while the rest [i.e. Mi Equipment (MK MK, Not Rated), Elsoft Research (ELSR MK, Not Rated), MMS Ventures (BUY; TP: MYR2.02), Aemulus Holdings (AMLS MK, Not Rated)] are mainly exposed to the smartphone segment which is seeing slower growth due to high base. Alongside an on-going replacement cycle for ViTrox’s AXI customers, ViTrox’s earnings visibility is also superior compared to the rest.

 

 

 

Regards,

Ivan Yap | Analyst, Equity Research

Level 7, Tower C, Dataran Maybank, 1, Jalan Maarof, 59000 Kuala Lumpur, Malaysia

Tel: 03 2297 8612 | Fax: 03 2284 2137 | Email: ivan.yap@maybank-ib.com

 

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