Avi-Tech Electronics - RHB Invest 2018-05-08: Brace For Slowdown In 3Q18

Avi-Tech Electronics - RHB Invest 2018-05-08: Brace For Slowdown In 3q18 AVI-TECH ELECTRONICS LIMITED SGX: BKY

Avi-Tech Electronics - Brace For Slowdown In 3Q18

  • We downgrade Avi-Tech to NEUTRAL from Buy, with lower DCF-derived Target Price of SGD0.43 from SGD0.59, suggesting a 5% downside.
  • Avi-Tech’s engineering and manufacturing customers supply wafer machines to Taiwan Semiconductor Manufacturing Co Ltd (TSMC), which trimmed its full-year revenue target due to softer demand for smartphones and uncertainty over crypto mining. This will likely have a negative impact on Avi-Tech’s customers as orders for machines and parts would be delayed, which would in turn affect Avi-Tech.
  • We cut out FY18F estimates by 36% to factor in the slowdown in the semiconductor sector globally, and expected delays in orders as highlighted above.
  • The stock has an attractive FY18F dividend yield of 5.4%.



Semiconductor giant to negatively impact supply chain.

  • Taiwan Semiconductor Manufacturing Co Ltd (TSMC) trimmed is full-year revenue target due to softer demand for smartphones and uncertainty over crypto currency mining. We think this will likely have a negative impact on Avi-Tech Electronics (Avi-Tech) as its engineering and manufacturing customers supply wafer machines to TSMC. We expect orders for machines and parts to likely be delayed, which would in turn affect Avi-Tech.
  • In addition, we also notice a slowdown in many of its semiconductor peers globally. As a result, we have cut our FY18F estimates by 36% as we expect a significant slowdown in both segments, which happen to have high operating cost bases due to labour requirements for customisation in accordance to customers’ needs.


Burn-in services still growing.

  • As Avi-Tech mainly provides burn-in services for chipmakers in the automotive sector, where there has been gradual and steady growth, we expect the burn-in segment to continue to grow at 10-15% pa, and not be impacted by the slowdown in the semiconductor sector.


Supported by attractive yield of 5.4%.

  • Management has shown that they are willing to reward shareholders with attractive dividends in the past. We think that management will likely increase the dividend payout ratio to 85% and above, as Avi-Tech has a net cash balance and strong operating free cash flows. 
  • The stock has an attractive 5.4% yield for FY18F.


Potential negative in 3Q18, downgrade to NEUTRAL.

  • As a result of expected order delays at both the engineering and manufacturing segments, which would likely impact Avi-Tech’s earnings, we downgrade our FY18F earnings by 36%, resulting in our DCF-derived Target Price being lowered to SGD0.43 from SGD0.59 – this implies FY19F P/E of 11.5x.
  • In addition, there has been a slowdown in the sector, as seen in results released by its peers in the sector. As a result, we downgrade Avi-Tech to NEUTRAL. The stock is however backed by an attractive FY18F yield of 5.4%, and management is actively exploring M&A opportunities. 
  • Any potential earnings accretive M&As (given its war chest of SGD32m) would be a positive for shareholders.
  • Key risks include a slowdown in the economy and the semiconductor sector.





Jarick Seet RHB Invest | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2018-05-08
SGX Stock Analyst Report NEUTRAL Downgrade BUY 0.43 Down 0.590



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