Mixed developments in 2Q22, but thesis intact
Despite potential hiccups in ViTrox’s MVS segment from subdued Chinese
demand, the ABI segment is expected to fare sequentially better in 2Q22
following the resolution of supply bottlenecks last month. Our BUY call,
TP (pegged to 41x FY23 PER, at +1SD to the 5Y mean) and earnings forecast
are maintained. ViTrox remains our top MY ATE pick owing to its dominant
position in machine vision tech, diversified customer base and exposure to
high-growth sectors such as EVs/5G/IR4.0; accumulate on weakness.
AXI component shortage resolved in May
ViTrox’s Automated Board Inspection (ABI) segment is expected to see
strong sales growth momentum in 2Q22, underpinned by sustained AOI
shipments and the resumption of AXI production following the resolution
of acute component (motion control and driver) shortages in May. To
recap, ABI (customers predominantly EMS/CMs in the telco infrastructure,
automotive and computing sectors) was the fastest growing segment (+73%
YoY) and contributed 56% of group revenue in 1Q22. As at end-April, ABI’s
backlog/funnel remained robust at MYR140m/254m respectively, with
mgmt expecting it to contribute c.MYR95-115m to group turnover in 2Q22.
China lockdowns to weigh on MVS segment
In contrast to improving ABI fortunes, ViTrox’s Machine Vision System (MVS)
segment is expected to undergo sequential weakness in 2Q22 as slowing
Chinese demand and rising material costs weigh on its customers’ order
outlook. Although mgmt is confident of managing near-term margin
pressures via temporary cost pass-throughs, lockdowns in China could pose
a drag on revenue growth as its China/Taiwan customers account for c.30-
40% of the segment’s total avg turnover (and a heftier 80% of the MVS-T
sub-segment). However, revenue shortfall from China will likely be
mitigated by strong automotive demand for MVS-S systems and at most,
we opine the net decrease in MVS’ total QoQ revenue growth to be c.25%.
Sustained ASP increases from value-add features
Notwithstanding the abovementioned temporary ASP adjustments to counter inflationary pressures, we’re upbeat on mgmt’s long-term strategy of incorporating value-add features such as AI/IoT capabilities (currently only available in <10% of portfolio) across its product range, as well as efforts to onboard customers to its in-house date analytics platform (VOne) in order to sustain longer-term ASP increases. Should it be successful, ViTrox’s margin profile is likely to improve further.