Avi-tech Electronics Limited - DBS Research 2016-09-09: SMC Radar Exploration

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AVI-TECH ELECTRONICS LIMITED BKY.SI

Avi-tech Electronics Limited - SMC Radar

• Avi-tech Electronics Limited (Avi-tech) is a supplier of semiconductor burn-in solutions, electronics turnkey projects and trades in semiconductor-related equipment for manufacturing companies. 
• At 8x T12M PE, the group trades at a 42% discount to larger peers’ 13x T12M PE, which appears attractive for a potential growth and dividend play (offers prospective yield of almost 12% at current prices). 
• Further, backed by net cash of S$27.5m (or c.60% of current market cap), we see share price re-rating when the company successfully exists from the SGX watch-list, as earnings are delivered and when cash is deployed.

About Avi-Tech

• Incorporated in 1981, Avi-tech is a long-standing total solutions provider for burn-in services, burn-in board manufacturing and PCBA services, and engineering services for the semiconductor, electronics and life sciences industry. While it is currently headquartered in Singapore, Avi-tech also has offices in Malaysia, the Philippines, Taiwan, China and the US, which facilitates the company’s ability to serve a broad-based clientele across diverse markets.
• Stripping out contributions from discontinued operations, Avi-tech registered a 71.4% jump in profit from continuing operations y-o-y to S$6.4m for FYE Jun’16. On a net basis, it would have otherwise recorded a decline of 5% y-o-y to S$6.2m – mainly as the discontinued imaging equipment and energy efficient products business contributed >40% (or S$2.8m) to the group’s net profit in FY15.
• Following the board’s decision to enter into restructuring into early 2014, the subsequent voluntary liquidation of Avi-tech’s US subsidiaries, Aplegen Inc and Verde Designs Inc were completed in 4Q15 and 2Q16 respectively. Despite the impact of the liquidations, we note that the group’s FY16 net profit remained fairly steady y-o-y, helped by higher revenues from some of its core segments, ongoing cost-control measures and productivity gains.
• Meanwhile, Avi-tech’s total revenue grew 19.5% y-o-y from S$28.4m in FY15 to S$33.9m in FY16, which is driven by contributions from the following key segments:&nbsp

  1. Burn-in services (26.4% of FY16 revenue) 

     Burn-in is essentially a test in which components of a system are stress tested (or run for an extended period of time) to detect problems prior to assembly. As a leading provider of burn-in services, Avi-tech works closely with leading semiconductor manufacturers to serve industries that require fail-safe or high-reliability semiconductor components (i.e. microprocessors and automotive products).

  2. Burn-in boards and board manufacturing (40.4% of FY16 revenue) 

     In addition to the provision of burn-in services, Avi-tech is also engaged in the complementary design and manufacture of burn-in boards, as well as niche printed circuit board assembly services for industries ranging from medical, mobile communications and aviation.

  3. Engineering services (33.2% of FY16 revenue) 

     Avi-tech also provides an extensive suite of engineering services – spanning design, development and full turnkey outsourced manufacturing and system integration of semiconductor equipment to lab- automation systems for the life sciences and biotech industries. One of the group’s key competitive strengths lies in its provision of system integration services for refrigeration-based High Power Burn-in Systems and Lithography Tool for semiconductor front-end applications.
• While Avi-tech works closely with leading semiconductor and system solution providers, its performance is not conditioned upon broad semiconductor equipment spending trends. Rather, given that the boards manufactured and/or burn-in services provided by the company ultimately cater to critical components (such as sensors and processors) that feed into two main end- segments – automotives and high-end servers, we believe that Avi-tech’s organic medium-term growth prospects should be mainly led by the:- 

  1. Rising adoption of automotive sensors 

     From improving the response of safety and efficiency functions to supporting higher electric content per vehicle, automotive sensors have been and are expected to play an increasingly important role ahead. Further, poised to run on significantly higher sensor content and more sophisticated sensor systems, we think the advent of the driverless car market (which Avi-tech had begun supplying to from late 2015) could provide the next leg of growth for Avi-tech.

  2. Commoditisation of big data and cloud computing should continue to drive demand for high-end servers

     The management team has long expressed their intent to grow the company’s value proposition through M&A or strategic collaborations in complementary and synergistic areas. Following the exit of its US businesses in 2Q16 and armed with net cash of S$27.5m, we think that the group will likely intensify its exploration of strategic opportunities in the near-term to further unlock shareholder value.
• Separately, while Avi-tech does not have a stated dividend policy (the company typically pays dividends when profitable), it has proposed to pay out nearly 90% of FY16 earnings (vs 31% payout a year ago) in dividends. At current prices, this represents an attractive prospective yield of almost 12%. All else equal, we believe that the group’s strong net cash balance and stable operating cash flows should continue to provide support for Avi-tech’s ability to pay dividends ahead.

Key risks

1. Ability to meet conditions for removal from SGX watch-list, 
2. Macro-economic uncertainty could weigh on the end-demand for consumer electronics and automotives, and in turn semiconductor equipment, 
3. Non-optimal deployment of cash, and 
4. Success of subsequent M&A or strategic collaborations.

Valuations

• Valuations at 7x T12M PE represents a steep 56% discount to close peers’ 13x T12M PE, which appears attractive for a potential growth and dividend play – offers prospective yield of >12% at current prices.
• Further, armed with net cash of S$27.5m (or >60% of current market cap), we see share price re-rating when the company successfully exits from the SGX watch-list, as earnings are delivered and when cash is deployed.

NOT RATED
Target Price: N/A

Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-09-09

DBS Vickers SGX Stock Analyst Report NOT RATED Maintain NOT RATED 99998 Same 99998