Vitrox - NOT RATED - 19 March 2012

Stock Name: VITROX
Company Name: VITROX CORPORATION BHD

Research House: KENANGA

Price Call: HOLD

Target Price: 0.79

We attended the company's analysts briefing recently andcame back feeling rather neutral on the company's outlook in the short term.Vitrox posted a poor set of results in 4QFY11 due to lower sales volume acrossits business segments. The slowdown in the semiconductor and electronicsindustry due to the European debt crisis and a sluggish US economy were themain causes of the weak result. Management expects the industry to recover onlyin 2HCY12 and guided that the group's next 1QFY12 results may be worst than4QFY11. Recently, the group has been trying to break into the automotive industryin Europe. However, we think this would be a challenging task for the companyas there are high barriers to entry into the European market. We currently valueVitrox at a target price of RM0.79 based on a PER of 6.6x (3-year historicalforward PER) over the consensus' FY12 EPS forecast of 12.0 sen. 

Poor results for4QFY11.  Vitrox's 4QFY11 resultsposted a decline of 32% and 88% in revenue and net profit respectively comparedto the preceding quarter. The current macroeconomic slowdown has dampened thedemand for its machine vision systems (MVS), electronic communication system(ECS) and automated board inspection (ABI). For the full year FY11 result, theimpact was lesser with revenue declining 10% YoY and net profit seeing a dropof 30%. 

Dividend. Aninterim dividend of 1 sen per share tax exempt was announced by the company in4QFY11. The company said it may proposed a further 1 sen tax exempt finaldividend for FY11 later in the middle of this year.  

Better outlook in2HCY12. Management guided that the outlook for 1HCY12 is still uncertaindue to the current global economic uncertainty. Hence, the group's 1QFY12result would likely be in the red as manufacturers are still uncertain aboutthe economy and only when they see  arecovery will they start to order additional machines from Vitrox. That said,management believes that the industry will rebound in 2HCY12. 

Challenging Europeautomotive market. The group foresees the demand for its machine visionaryproducts to rise in the European automotive market. Although the group itselfbelieves that it is a challenging task to penetrate into Europe due to the high  barrier of  entry,  it  is  still firm  on  trying to  break  into the market here since the Europe market is a big market and successwould mean a much improved prospect for the group's earnings.  

On the watch list.As we have yet to re-activate our coverage on the company, we do not have anyrecommendation on Vitrox at this juncture. Nonetheless, based on the consensus'FY12 EPS of 12.0 sen and 3-year historical forward PER of 6.6x, we gather thatVitrox can be fairly valued up to RM0.79 at this juncture. 

Source: Kenanga