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).

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.

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.

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.

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.

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.

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