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.

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.

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.

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.

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