Avi-Tech Electronics - RHB Invest 2017-05-15: A Better 4Q17 Ahead

AVI-TECH ELECTRONICS LIMITED BKY.SI

Avi-Tech Electronics - A Better 4Q17 Ahead

Avi-Tech reported a great 3Q17, with NPAT growing 10.5% YoY. This was in line with our expectations.
Going forward, we expect a much better 4Q17 due to the strong projects pipeline on hand.
Avi-Tech is also on track to record stable YoY NPAT growth of 10-15% in FY17-18, given a strong balance sheet and positive cash flow generation.

Lastly, with M&A possibilities – coupled with a potential special dividend in FY17 to reward shareholders – we remain positive on this stock and maintain our BUY call and SGD0.52 TP (18% upside).

As at 2Q17, management has implemented a dividend payout policy of at least 30% of total profit. This suggests a strong intent over Avi-Tech Electronics (Avi-Tech) outlook, as well as returning value to shareholders.
In fact, the group has a track record of paying out at least 50% of NPAT over the past few years and management said it would likely maintain this ratio going forward.
With the positive outlook coupled with Avi-Tech’s strong cash balance, we believe that there may be a potential special dividend in FY17 to reward shareholders. This would likely boost FY17F yield to c.5.7%.

With a SGD30m-plus war chest at its disposal, management is looking at accretive acquisitions and new avenues of growth that would fit synergistically with Avi-Tech’s existing service offerings.
We believe the group has likely learnt from past lessons and would utilise its cash more efficiently going forward. With an accretive acquisition, Avi-Tech would be able to enhance NPAT drastically, with a combination of debt and cash financing, in our view.

Avi-Tech’s burn-in services segment is well-positioned to benefit from the rising sophistication of vehicles and, ultimately, the advent of driverless vehicles, in our view.
With other disruptive technologies in the Internet of things (IoT) era – and the march towards cloud businesses and smart cities – we believe another wave of demand for semiconductor burn-in and other related services is coming. This ought to be a further boost to the group.

We believe that Avi-Tech’s long-term growth prospects are positive, in line with the digitalisation macroeconomic trends. As a result, we view that a conservative and stable annual NPAT growth rate of 10% would be sustainable over the longer term.

Going forward, we expect a much better 4Q17 for Avi-Tech due to the strong pipeline of projects it has on hand. The group is also on track to record stable YoY NPAT growth of 10-15% in FY17-18. This is given its strong balance sheet (net cash: ~SGD31m) and positive cash flow generation.
Lastly, with M&A possibilities, coupled with a potential special dividend in FY17 to reward shareholders, we remain positive on Avi-Tech and maintain our BUY call and SGD0.52 TP.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2017-05-15

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.520 Same 0.520