Avi-Tech Electronics - RHB Invest 2017-12-19: Long-Term Demand Intact

Avi-Tech Electronics - RHB Invest 2017-12-19: Long-Term Demand Intact AVI-TECH ELECTRONICS LIMITED BKY.SI

Avi-Tech Electronics - Long-Term Demand Intact

  • We remain positive on Avi-Tech Electronics’ outlook which would likely benefit from the increased use of electronics in the automotive sector as well as IoT. With a net cash of SGD32.4m, we think that there is a high possibility it would likely acquire an accretive target in the near term. 
  • With the recent correction in Avi-Tech's share price, the company’s valuation now looks attractive, especially as compared to its Malaysian-listed peers. In addition, the stock offers an attractive FY18F dividend yield of 5.2%. 
  • We reiterate a BUY rating with a SGD0.59 TP (34% upside).

Positive long-term growth prospects. 

  • We believe that Avi-Tech’s long-term growth prospects are positive, in line with the digitalisation macroeconomic trends and increased electronics in the automotive sector. As a result, we view that a conservative and stable annual NPAT growth rate of 10-15% would be sustainable over the longer term.

Strong growth in two of its business segments. 

  • Avi-Tech’s revenue increased 31.3% YoY to SGD11.1m, driven by a 61% and 14% YoY growth in its manufacturing and printed circuit board assembly (PCBA) services, and its burn-in services respectively. 
  • Gross profit margin decreased from 29.54% in 1Q17 to 26.41% in 1Q18. The decrease was mainly due to higher revenue contributed by the manufacturing and PCBA services business segment, which yields a lower gross profit margin.

Over SGD32m war chest for M&As. 

  • With a SGD32m war chest at its disposal, management is looking at accretive acquisitions and new avenues of growth that would fit synergistically with the company’s 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 drastically, with a combination of debt and cash financing, in our view.

Smart cities and technology upgrades to boost demand. 

  • 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 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.

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

  • Going forward, we expect the growth for FY18 to be stable, around 10-15% pa. 
  • With its strong balance sheet and positive cash flow generation, we think that there is a high possibility it would acquire an accretive target in the near term and possibly, a positive re- rating catalyst. As a result, we remain positive on Avi-Tech’s long term growth prospects and maintain our BUY call with an unchanged DCF-based SGD0.59 TP implying a 12x FY18F P/E. 
  • It also provides an attractive FY18F dividend yield of 5.2%. 
  • Key risk is a slowdown in the economy.

Singapore Strategy & Top Picks 2018 - RHB Invest 2017-12-19: There Is Still Potential To Generate Alpha
Avi-Tech is one of the 2018 Top Stock Picks by RHB Invest.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2017-12-19
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.590 Same 0.590