AVI-Tech Electronics Ltd - CIMB Securities 2017-01-19: Firmly back on track

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AVI-TECH ELECTRONICS LIMITED BKY.SI

AVI-Tech Electronics Ltd - Firmly back on track

• AVI-Tech Electronics Ltd (AVIT) is a total solutions service provider offering burn-in, engineering and manufacturing services.
• The company reported two consecutive years of profit after exiting loss-making businesses in the US. 
• Net cash (Sep ‘16A) formed 56% of AVIT’s market capitalisation (as at 18 Jan ‘17).
• AVIT trades at historical FY6/16A P/E of 8.6x and historical dividend yield is 5.8%.

What it does 

• We met AVIT management on 17 Jan 2017. 
• Incorporated in Singapore in 1981 and listed on the Mainboard of the SGX in 2007, AVIT is a total solutions provider for BurnIn, Burn-In Board Manufacturing and Printed Circuit Board Assembly (PCBA) and Engineering services working with global Original Equipment Manufacturers in the semiconductor, electronics and life sciences industries.

What has changed? 

• Recent key corporate developments shared by management were 
  1. exit from the SGXWatchlist on 16 Sep 2016, 
  2. from 2QFY6/16, there was no more financial impact from two loss-making US subsidiaries that the group had disposed of, and 
  3. resumption of dividend payment from FY6/15A with the return to profitability.

Key risks 

• Management highlights the following key risks: 
  1. customer concentration risk – in FY6/16A, the largest customer accounted for 21% of the group’s revenue while the second largest customer accounted for 19%. These two customers represented 40% of FY6/16A turnover. Key customers include Infineon, Linear Technology, Cavium and Texas Instrument. 
  2. US$ exposure – management estimated that roughly 85% of sales were in US$ terms and 60-65% of material costs were US$-denominated.

Management’s outlook 

• Management shared that the group will continue to benefit from two key secular trends: 
  1. with the use of more sensors in the automotive industry, management believes failsafe electronic components requiring burn-in services will provide the growth momentum for the Burn-In Services segment, and 
  2. the Internet of Things is anticipated to benefit a wide range of industries and management believes AVIT will benefit with its ability to provide a suite of burn-in, board design and manufacturing services.

Net cash balance sheet 

• As at end-Sep 16A, AVIT’s net cash was S$30.2m or 56% of its market capitalisation as at 18 Jan 2017. 
• Management’s intention is to continue paying dividends as long as the company is profitable. 
• As the company has minimal capex needs, management is also keen to explore inorganic growth. However, management has said that having learnt from its previous experience, AVIT will be guided by acquisition criteria such as similar industry, matured operations as well as profitable and non-R&D intensive business.

Historical valuations 

• As at 19 Jan 2017, AVIT is trading at a historical P/E of 8.6x versus its peer average of 19.2x. 
• AVIT’s historical ROE is 14.0% versus the peer average of 5.7% and AVIT’s historical dividend yield is 5.8% versus the peer average of 0.3%.

NOT RATED
Target Price: N/A

William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2017-01-19

CIMB Securities SGX Stock Analyst Report NOT RATED Maintain NOT RATED 99998.000 Same 99998.000