Avi-Tech Electronics - RHB Invest 2017-05-29: Riding On The Automotive Boom

AVI-TECH ELECTRONICS LIMITED BKY.SI

Avi-Tech Electronics - Riding On The Automotive Boom

Avi-Tech is a market leader in burn-in solutions serving a niche customer segment that requires fail-safe tests.
The automotive semiconductor segment in one such segment that requires a fail-safe burn-in test for its products. This means that there is always a need for its solutions.

As at FY16, 50% of the company’s revenue was from the automotive sector. Electric vehicle is likely to boost the demand of the automotive semiconductor business as more cars have an increase in semiconductor components. This would in turn result in a rise in the demand for more of its burn-in solutions.
Maintain BUY with a SGD0.52 TP (24% upside).

As at 2QFY17 (Jun), management 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 its 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 FY17F to reward shareholders. This would likely boost FY17F yield to c.5.7%.

With a > SGD30m 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 experiences and would utilise its cash more efficiently going forward. With an accretive acquisition, it 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 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 4QFY17F for Avi-Tech due to the strong pipeline of projects it has in hand.
The group is also on track to record stable YoY NPAT growth of 10-15% in FY17F-18F. 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 FY17F to reward shareholders, we remain positive on the group.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2017-05-29

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