Avi-Tech Electronics - RHB Invest 2018-05-16: Slowdown Hits 3QFY18

Avi-Tech Electronics - RHB Invest 2018-05-16: Slowdown Hits 3qfy18 AVI-TECH ELECTRONICS LIMITED SGX: BKY

Avi-Tech Electronics - Slowdown Hits 3QFY18

  • Maintain NEUTRAL, with an unchanged DCF-backed Target Price of SGD0.43, offering a 2% downside.
  • As mentioned in our previous report (Avi-Tech Electronics - Brace For Slowdown In 3Q18), Avi-Tech reported weak 3QFY18 results, with both topline and bottomline slumping 28.6% and 59% y-o-y respectively. This is due to a sharp decline of 38% in its engineering services segment, largely caused by delays in production ramp-up from customers as a result of macroeconomic uncertainties in the broad semiconductor and electronics manufacturing sectors.
  • We also expect a weak 4Q18 ahead but note that the company has an attractive yield of 5.6%.

Semiconductor slowdown hits engineering services.

  • Engineering services slumped 38% y-o-y to SGD4.9m in 9MFY18 (Jun). This was largely caused by delays in a production ramp-up from customers as a result of a slowdown in the semiconductor and electronics manufacturing sectors. 
  • Previously, we highlighted in our channel checks that Avi-Tech Electronics’ (Avi-Tech) engineering services customers supplying wafer machines to Taiwan Semiconductor Manufacturing (TSMC) (2330 TT, NR) – which trimmed its full-year revenue target due to softer demand for smartphones and uncertainty over crypto currency mining. Orders for machines and parts are therefore likely to be delayed, which would in turn affect the company. As a result, we expect weakness to persist into 4QFY18F as well.

Burn-in, manufacturing and PCBA services still growing.

  • Avi-Tech mainly provides burn-in, PCBA and manufacturing services for chipmakers in the automotive sector – which has seen 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. 
  • As at 9M18, the burn-in and PCBA services segment s grew 15.2% and 17% respectively y-o-y.

Supported by attractive yield of 5.6%.

  • Management has shown that it is 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 is in a net cash position and strong operating free cash flow. The stock has an attractive 5.6% yield for FY18F.

Weakness to persist in 4Q18.

  • The result of expected order delays at the engineering segment would likely impact Avi-Tech’s earnings negatively into 4Q18. The company also faced the slowdown in the semiconductor space, as did its peers, that clearly reflected in their results released recently. Therefore, we maintain our NEUTRAL recommendation, with an unchanged DCF-backed Target Price of SGD0.43, which implies FY19F P/E of 11.5x. 
  • The stock is, however, backed by an attractive FY18F yield of 5.6%, and management is actively exploring M&A opportunities. Any potential earnings accretive M&As (given its war chest of SGD33m) 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/ 2018-05-16
SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 0.430 Same 0.430