Avi-Tech Electronics - RHB Invest 2018-01-30: Outperformance To Continue

Avi-Tech Electronics - RHB Invest 2018-01-30: Outperformance To Continue AVI-TECH ELECTRONICS LIMITED BKY.SI

Avi-Tech Electronics - Outperformance To Continue

  • We remain positive on Avi-Tech’s outlook, as it should benefit from increased demand for electronics in the automotive sector, as well as the Internet of Things (IoT). 
  • With net cash of SGD32.4m, we think there is a high possibility that it may acquire a yield-accretive target in the near term. With Avi-Tech's recent share price correction, valuations appear very attractive, especially when compared to its listed Malaysian peers. 
  • It also offers an attractive FY18F dividend yield of 4.6%. As such, we maintain our BUY call, with an unchanged DCF-based TP of SGD0.59 (16% upside).

Positive momentum likely to continue into 2QFY18 (Jun), and the possibility of an interim dividend. 

  • Avi-Tech Electronics’ (Avi-Tech) revenue increased 31.3% YoY to SGD11.1m in 1QFY18, driven by 61% and 14% YoY growth at its manufacturing & PCBA services and burn-in services divisions respectively. GPM shrank to 26.41% in 1QFY18, from 29.54% in 1QFY17. The decrease was mainly due to the higher revenue contributed by the manufacturing & PCBA services unit, which yields a lower GPM.
  • Going forward, we expect the positive momentum to continue into 2QFY18, with stronger NPAT growth due to continued strong demand from its customers for its services, as well as sustained strength in the semiconductor industry. 
  • We also expect Avi-Tech to continue rewarding shareholders with an interim dividend, as a result of its strong performance.

War chest of over SGD32.4m for M&As. 

  • With a SGD32.4m war chest at its disposal, management is looking at yield-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 a yield-accretive acquisition, Avi-Tech would be able to enhance NPAT drastically, with a combination of debt and cash financing, in our view.

Strong insider buying by CEO. 

  • Avi-Tech’s CEO and majority shareholder, Mr Lim Eng Hong has bought shares in the open market over several occasions in 2017, with the latest done on 20 Dec 2017 at SGD0.456/share. 
  • In total, Mr Lim has bought c.1.33m shares at an average of SGD0.415/share. We think this is a positive testament to Avi-Tech’s strong fundamentals and positive outlook.

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

  • Going forward, we expect Avi-Tech’s earnings growth in FY18 to be stable, at 10-15% YoY. With its strong balance sheet and positive cash flow generation, we believe there is a high possibility that it may acquire a yield-accretive target in the near term – which would be a positive re-rating catalyst, in our view. As a result, we remain positive on its long-term growth prospects. 
  • We maintain our BUY call and DCF- derived TP of SGD0.59, which implies FY18F P/E of 12x. The stock also provides an attractive FY18F dividend yield of 4.6%.
  • Key risks include a slowdown in the economy.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2018-01-30
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.590 Same 0.590