Avi-Tech Electronics - RHB Invest 2018-11-13: Engineering Slowdown Continues

AVI-TECH ELECTRONICS LIMITED (SGX:BKY)

Avi-Tech Electronics - Engineering Slowdown Continues

Maintain NEUTRAL, with new DCF-backed Target Price of SGD0.34 from SGD0.38, 6% upside plus 7% yield.
The slowdown in the semiconductor sector has impacted Avi-Tech negatively, and should continue to hit its engineering segment in subsequent quarters. Burn-in service would continue to grow steadily, but profitability is likely to be muted due to the engineering division’s weak performance. As such, we lower our FY19F-20F earnings by 7% and 6%.
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We believe that Avi-Tech Electronics’ long-term growth prospects are positive, in line with the digitalisation of macroeconomic trends, increased electronics in the automotive sector, and the smart city initiatives around the region.
As the company 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 5-10% pa, and not be impacted by the slowdown in the semiconductor sector. This is partially also due to the fact that the majority of its burn-in customers are from the automotive sector, which is enjoying steady growth.

With a net cash balance sheet and a strong operating free cash flow, we think that that management will continue to reward shareholders with attractive dividends despite the drop in profits.
Avi-Tech is likely to payout 100% of its profit as well due to the strong balance sheet. We are forecasting 6.7% attractive yield for FY19F (Jun).

With a SGD88m war chest at its disposal, management is looking at 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 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.

The engineering segment had taken a hit due to a delay in customer projects and slowdown in orders from its customers, resulting in a loss for that segment that dragged down profitability.
We believe that it will likely take about 8-8 months to ramp up hence this segment will continue to be a drag for its profitability in FY88F.

A slowdown in the sector is seen in the quarterly results released by its peers in the sector. As a result, we lower DCF-backed Target Price to SGD8.88, as we reduce FY88F-88F earnings by 8% and 8%.
Avi-Tech is however backed by an attractive FY88F yield of 8.8%, and management is actively exploring M&A opportunities.
Any potential earnings accretive M&As would be a positive for shareholders.
Key risk is a slowdown in the economy.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2018-11-13

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