Avi-Tech Electronics - RHB Invest 2017-11-14: Kicking Off FY18 With A Bang

Avi-Tech Electronics - RHB Invest 2017-11-14: Kicking Off FY18 With A Bang AVI-TECH ELECTRONICS LIMITED BKY.SI

Avi-Tech Electronics - Kicking Off FY18 With A Bang

  • Avi-Tech had a solid 1QFY18, with NPAT growing 16.6% YoY despite incurring a forex loss and providing an allowance for obsolete inventory that totalled SGD0.23m. This was driven by its manufacturing and PCBA services and burn-in services units, which grew 61% and 14% YoY respectively. 
  • We remain positive on its outlook, as it may likely benefit from the increased incorporation of electronics in the automotive sector. 
  • With net cash of SGD32.4m, there is a high possibility it would likely acquire a yield-accretive target over the near term. 
  • BUY, with a SGD0.59 TP (12% upside). 

Robust growth in two business segments. 

  • Avi-Tech Electronics’ (Avi-Tech) revenue rose 31.3% YoY to SGD11.1m. This was driven by a 61% and 14% YoY growth in its manufacturing and printed circuit board assembly (PCBA) services segment and its burn-in services unit respectively. 
  • GPM decreased to 26.41% in 1QFY18 (Jun) from 29.54% in 1QFY17. This was mainly on higher revenue contributed by its manufacturing and PCBA services unit, which records narrower GPMs.

Positive long-term growth prospects. 

  • Its long-term growth prospects are positive, in line with the digitalisation macro-economic trend and increased incorporation of electronics in the automotive sector. Thus, a conservative and stable annual NPAT growth rate of 10-15% would be sustainable over the longer term.

War chest of > SGD32m for M&As. 

  • With a > SGD32m war chest at its disposal, Avi-Tech is looking at accretive acquisitions and new avenues of growth that would fit synergistically with existing service offerings. 
  • We believe it 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 greatly, with a combination of debt and cash financing, in our view.

Smart cities and technology upgrades to boost demand. 

  • Its burn-in services unit 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 – which would further boost the group’s prospects.

Long-term growth on track, with M&A as a bonus. 

  • Going forward, we expect its earnings growth in FY18 to be stable, around 10-15% pa. With its strong balance sheet and positive cash flow generation, there is a high possibility it could acquire a yield-accretive target in the near term and, possibly, trigger a positive re-rating catalyst. As a result, we remain positive on Avi-Tech’s long term growth prospects. 
  • Maintain BUY, with an unchanged DCF-based SGD0.59 TP implying a 12x FY18F P/E. 
  • Avitech also offers an attractive FY18F dividend yield of 4.4%. 
  • A key risk to our call is a slowdown in the economy.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2017-11-14
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.590 Same 0.590