Vitrox - BUY - 22 May 2008

Vitrox Corporation - Soft patch (Results Note)



Price: RM0.77

Target Price: RM0.98

Recommendation: BUY



· 1Q08 results are below expectations. Slower market dynamics as a result of the uncertain global economic outlook that had prevailed during the initial part of the year had impacted results negatively. Reported revenue of RM6.9m is a mere 13.4% of our forecast while net profit of RM2.4m is 12.3%.

· QoQ, 1Q08 revenue dipped 36.8% to RM6.9m while net profit was lower by 44.9% to RM2.4m. Slower demand for its vision systems and solutions as testing houses cut down on capital expenditure in view of the uncertain economic outlook during the first few months of the year had impacted the company negatively. Margin meanwhile was also lowered to 35.4% at the net versus 40.6% in 4Q07. Reduced economy of scale couple with higher expenses associated with the expansion drive were the main attributing factors.

· YoY, revenue of RM6.9m was flat versus 1Q07's RM6.7m while net profit of RM2.4m was also similarly flat. With no pick up in demand for its systems and solutions couple with an adverse currency effect had capped performance in the near term.

· Forecast is trimmed. In view of the uncertain economic outlook and the soft semiconductor environment, we would therefore prefer to be conservative and lower our revenue forecast for FY08 and FY09 by 22.2% and 10.7% respectively to RM39.9m and RM51.3m respectively. As a corollary, net profit for the relevant years are also lowered by the same quantum. Our revised net profit forecast is now RM15.1m and RM19.5m for FY08 and FY09 respectively.

· Buy recommendation is maintained but with a lower target price of RM0.98 versus RM1.26 previously applying the same 10x multiple. Despite the trying market conditions, the company continues to hold much latent potential with top-of-class offerings in terms of solutions and intellectual property. Net margins of 35% is still stellar and we share management optimism that company's fortunes will be lifted once the current soft patch is over.





KENANGA INVESTMENT BANK BERHAD (15678-H)