Avi-Tech Electronics - RHB Invest 2018-02-15: Rewarding Shareholders With A Bigger Ang Bao

Avi-Tech Electronics - RHB Invest 2018-02-15: Rewarding Shareholders With A Bigger Ang Bao AVI-TECH ELECTRONICS LIMITED BKY.SI

Avi-Tech Electronics - Rewarding Shareholders With A Bigger Ang Bao

  • Avi-Tech reported great 1HFY18 results, with revenue growing 19.5% y-o-y and operating income surging 14.9% y-o-y. NPAT was slightly lower, due to the absence of the forex gains present in 1HFY17 and lower rental income. 
  • Interim dividends were also 30% higher y-o-y, with a SGD0.013 declared. 
  • We remain positive on its outlook, which would likely benefit from increased electronics in the automotive sector. With net cash of SGD31.2m, we think that there is a high possibility that Avi-Tech is likely to acquire an accretive target in the near term. 
  • Maintain BUY and SGD0.59 Target Price (23% upside).

Positive long-term growth prospects. 

  • We believe that Avi-Tech Electronics’ (Avi-Tech) 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.

30% higher interim dividends – increased dividends for FY18 likely. 

  • With a net cash balance sheet and strong operating FCF, management has decided to declare a 30% increase in interim dividends to SGD0.013 for 1HFY18. We think this is a strong statement, with regards to rewarding shareholders and on its business fundamentals. 
  • We have also increased our FY18 dividend payout ratio projections to 70% (from 50%), which results in a projected yield of 6.9%. The company is more than capable of paying for this.

SGD32m war chest for M&As. 

  • With a SGD32m war chest at its disposal, management is looking at accretive acquisitions, as well as new avenues of growth that would fit synergistically with Avi-Tech’s existing service offerings.
  • We believe it has likely learnt from past lessons, and is to utilise its cash more efficiently. 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. 

  • The firm’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, as well as the march towards cloud businesses and smart cities, we believe another wave of demand for semiconductor burn-ins and other related services is coming. This ought to be a further boost to Avi-Tech.

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

  • Going forward, we expect FY18 growth for the firm to be stable, at ~10-15% pa. With its strong balance sheet and positive cash flow generation, we think there is a high possibility that it would acquire an accretive target in the near term and, possibly, a positive re-rating catalyst. As a result, we remain positive on AviTech’s long term growth prospects and maintain our BUY call and DCF-based SGD0.59 Target Price (23% upside). This implies a 12x FY18F P/E. It also provides an attractive FY18F dividend yield of 6.9%. 
  • A key risk to our call is a slowdown in the economy.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2018-02-15
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.590 Same 0.590