AVI-TECH ELECTRONICS LIMITED (SGX:BKY)
Avi-Tech Electronics - Higher Demand For Burn-In Testers From Advanced Driver-Assistance Systems
- Growth in semiconductor capex spend is set to continue into the next decade, stemming from emerging technologies, particularly in autonomous driving.
- Initiate coverage on Avi-Tech Electronics with a BUY and target price of S$0.57.
AVI-TECH ELECTRONICS − COMPANY BACKGROUND
- Incorporated in 1981 and listed on the SGX in 2007, Avi-Tech Electronics (SGX:BKY) provides burn-in, manufacturing & printed circuit board assembly (PCBA) as well as engineering services for the semiconductor, electronics and life sciences industries.
- Prior to listing in the 1990s, the bulk of sales exposure ( > 80%) stemmed from providing services for the memory chips segment within the semiconductor industry. Thirty years on, Avi-Tech Electronics has shifted its focus successfully towards the less-cyclical automotive segment, now constituting more than 50% of sales.
- The shift in sales mix from memory chips to automotive electronic components was evident over the past five years and has proven positive for the group.
- Avi-Tech Electronics' portfolio of customers spans geographically across Asia-Pacific, Europe and the US. For FY19, sales for Avi-Tech Electronics stemmed mainly from Singapore, the US and Malaysia, followed by others which includes Germany, the Philippines, Thailand, Taiwan and China.
- Channel checks indicate that its clientele include key global semiconductor players such as NXP Semiconductors, Infineon, Analog Devices (former Linear Tech) and Marvell Technology. The solid customer base provides for an excellent track record of receivables which averages 72 days, as well as a clean record from any collection write-downs since FY14.
AVI-TECH ELECTRONICS − INVESTMENT HIGHLIGHTS
Beneficiary of structural growth of automotive electronic components.
- Primarily exposed to the steadily growing automotive applications under the semiconductor industry, burn-in tester Avi-Tech Electronics has seen rising demand for its services. This is due to the increased adoption of safety-related vehicular electronics systems, as well as stronger penetration rates of electric and hybrid autos and the large market potential for autonomous vehicles, which require almost twice the semiconductor content of conventional cars. This irreversible trend is set to continue into 2030.
Captive customer base and strong management quality.
- Longstanding clients are public-listed MNCs that are key automotive semiconductor manufacturers, with market caps above US$24b. This provides for an excellent track record of receivables collection and also highlights the group’s strong reliability and service quality to customers.
Recent inclusion into the 2019 SGX Fast Track list.
- Avi-Tech Electronics is among the 95 SGX-listed companies in the list, highlighted to have high corporate governance standards and good compliance track records. This provides investors the assurance of the level of management quality, given the stringent admission criteria set by the regulatory body.
Provides steady EPS growth and sustainable yield.
- We estimate an EPS CAGR of 23% for Avi-Tech Electronics over the next three years, driven by the steady rise in electronic components within the automotive sector. An estimated DPS of S$0.025 is sustainable, which accounts for 49-69% of FY20F-FY22F core net profit.
STOCK IMPACT
Top-line expansion expected on rising demand for burn-in services.
- In tandem with automotive growth forecasted by key clients of Avi-Tech Electronics, revenue is estimated to rise at a 10.8% CAGR to FY22F.
Gross margin to improve.
- With the continued shift in sales mix towards the relatively more profitable burn-in services and PCBA segments, as well as ongoing cost control measures and productivity enhancement, we estimate gross margin to improve from 31.4% in FY19 to 35% in FY22.
Net profit CAGR of 23% over the next three years.
- Accordingly, net profit are forecasted to rise on improved gross profitability and operational leverage by 35%, 23%, 13% y-o-y for FY20-22 respectively. 1HFY20 net profit constitutes 48% of our full-year estimate.
RECOMMENDATION
Initiate coverage with BUY and target price of S$0.57.
- Our valuation is pegged to 1SD above its historical average EV/EBITDA of 5.7x amid the upcycle in automotive electronic components.
- Currently, Avi-Tech Electronics trades at 3.4x FY21F EV/EBITDA. On the back of higher operating cash flow, an estimated DPS of S$0.025/share is sustainable through to FY22, which translates to an attractive 6% yield.
- We believe valuation is supported by its strong balance sheet, which includes net cash of S$34.3m and a fully-paid commercial property in Singapore that is worth an estimated S$20m. These relatively risk-free assets provide a solid buffer for potential acquirers targeting the blue-chip customer portfolio of Avi-Tech Electronics.
- See Avi-Tech Share Price; Avi-Tech Target Price; Avi-Tech Analyst Reports; Avi-Tech Dividend History; Avi-Tech Announcements; Avi-Tech Latest News.
SHARE PRICE CATALYST
- Higher-than-expected factory utilisation rates for burn-in processes.
- Earnings-accretive M&A.
- Return of engineering contracts.
See attached 17-page coverage initiation report for complete analysis on Avi-Tech Electronics.
Clement Ho
UOB Kay Hian Research
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https://research.uobkayhian.com/
2020-02-19
SGX Stock
Analyst Report
0.57
SAME
0.57
