Vitrox – A Weak Start With Sequential Improvement Ahead: CGS

ViTrox Corp Bhd’s core net profit in 1Q24 fell by 53% yoy on the back of a decline in revenue and margins.

Revenue slid 11% due to lower shipment volumes from automated board inspection (ABI) and machine vision system (MVS-S) segments as well as lower ASP due to rising competition.

EBITDA margin also narrowed to 17.4% in 1Q24 (1Q23: 30.5%) as the group incurred higher R&D expense and replacement cost related to one of the critical modules for its equipment, amounting to c.RM5m.

CGS International (CGS), in a Company Note today (Apr 30), said overall, core net profit missed both our and consensus estimates, making up just 10% and 9% of full-year forecasts, respectively.

Guiding sequential improvement Management has guided for 2Q24F revenue of RM118m-135m, implying qoq growth of 6.3% at midpoint, with the growth to be anchored by higher shipment numbers across all its segments.

The group is seeing sustained strong traction from the China (44% of 1Q24 revenue) supply chain relating to consumer devices and data centres, although pricing competition appears to be more intense given the wider pool of vision inspection suppliers in the Chinese market.

However, the near-term outlook for its automotive segment (25% of 1Q24 revenue) remains soft due to elevated inventory and weak demand.

Trimming margin projections

CGS acknowledged the rising competition in the global vision inspection space as more Chinese players are venturing into the industry, capping upside to ASPs. They foresee ViTrox’s R&D expense will remain elevated at 12-13% of revenue (10-11% historically) as the group continues to spend to ensure a sustained technological moat over new players through new product introduction (NPI) projects.

CGS cuts their FY24-26F EPS by 3-4% as they assume a lower EBITDA margin of 26.3-27.4% (27.1-28.4% previously) but maintain our revenue growth projection. They project sequential improvement in the coming quarters on the back of gradual broad-based demand recovery for automation spending globally.

Maintain Hold

CGS maintains their Hold call with a slightly lower TP of RM7.23. At 33.4x FY25F P/E, the stock is trading well above its pre-pandemic (FY15-19) average of 22.9x and at a premium over its vision inspection peer average of 24.6x.

Re-rating catalysts appear unlikely as ViTrox faces rising competition.

Upside risks: stronger-than-expected shipment unit growth, uptick in ASP and earnings-accretive acquisitions. Downside risks: prolonged demand weakness, heightened competition, and chip war that could impede order visibility.

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