Sunday, August 9, 2015

'Like' >> 'Caution' - Vitrox (Risks Ahead) !!!

The automated vision inspection equipment maker is one of the beneficiaries of the stronger US dollar as it exports finished equipment to international clients.

70% to 80% of the firm’s sales are denominated in US dollars while only 30% of its cost is in US dollars. That makes them a net beneficiary of the weakening ringgit, which lost more than 12% against the greenback year-to-date (Aug 2015).

In 2014, Malaysia contributed slightly less than a third to its topline, followed by Taiwan which contributed a quarter and, China 16%, Mexico 10% and United States 8%.

Its customers include Cisco, Intel, GE, Flextronics, Osram, Fujitsu, Hitachi and Motorola.

In 2014, it bought a 22-acre industrial land for the company’s expansion for the next 10 years from Aug 2015. It has plans to expand its production facility on that land it bought for RM34mil.

Sitting on a cashpile of RM61mil as at end-March 2015, the money could be used to fund the expansion at Batu Kawan.

The cash is translated into 26 sen per share.

Vitrox produces globally competitive optical inspection equipment and its margins are much more superior compared to its peers.

At current (Aug 2015) capacity, the group is enjoying a net margin of 23% to 25%. From the financial year ended Dec 31, 2011 (FY11) to FY14, net profit margins range from 20% to 29%.

Its core businesses could be divided into the main divisions machine vision system, automated board inspection (ABI) and electronics communication system.

For the first quarter ended Mar 1 2015, ABI was the main growth driver.

As a group, net profit more than double to RM9.31mil from RM3.99mil a year earlier. That’s on the back of revenue which jumped 46% to RM33.26mil.

The group achieved another record year in FY14 as revenue surged 60% to RM170mil while earnings more than double to RM49mil compared to FY13.

It had allocated 14% of its revenue for research and development in FY13 and FY14.

Its free cash flow has improved tremendously from negative RM5.8mil in FY11 to RM28.9mil in FY14.

However, expects Vitrox’s upcoming second quarter 2015 results to be weaker year-on-year as it made record net profit of RM20mil for the second quarter 2014. On top of that, its pioneer status had expired in the first quarter 2015 and the earnings could be dragged down by tax expenses.

Vitrox is in the process of getting a new agreement from the Malaysian Investment Development Authority and expect an official update in the third quarter 2015.

At current price (05 Aug 2015), the stock is trading at forward price-to-earnings of 13.8 times. Regional peers are trading at an average of low teens while other local listed semiconductor players are trading at higher price-to-earnings because of the more stable income flow.

The company has a policy of paying out 20% of its net profit.

Looking ahead (Aug 2015 onwards), growth will come from the boom of Internet of things and growth of data centres.

Vitrox’s sales are one-off so it would need to replenish its orders to maintain earnings. This poses higher risks compared to semiconductor players that get recurring from producing parts for consumer gadgets.

Vitrox gets a bit of recurring income from servicing the machines but the size is not significant. The buyers usually change the machines in three to four years after the technology becomes obsolete.

Another potential risk to its earnings would be the tax exemptions it could get from the Government. They should be able to get the official letter in the third quarter 2015 but it will be another question if they were able to claw back the tax paid for the second quarter 2015.

In the event Vitrox could not recover the sum paid, its second quarter net income would be impacted as it would have to pay a corporate tax of 22%.

A slowdown in the semi-conductor sector would also affect sales a potential moderation in worldwide semiconductor manufacturing equipment spending going forward after two banner years of growth. On the other hand, new opportunities arise from new products with superior margins, new clients and higher sales.

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Please note that all data given are merely blogger's opinion. It is strongly recommended that you do your own analysis and research before investing.