Avi-Tech Electronics - UOB Kay Hian 2020-08-31: 2HFY20 Results In Line, Hit By Supply Chain Disruption

AVI-TECH ELECTRONICS LIMITED (SGX:BKY)

Avi-Tech Electronics - 2HFY20 Results In Line, Hit By Supply Chain Disruption

Avi-Tech Electronics's 2HFY20 headline earnings (+1.1% y-o-y) were bolstered by the government’s jobs support scheme (JSS), while core earnings (-20.1% y-o-y) were impacted by supply chain disruptions arising from the global lockdowns, which was flagged previously.
Avi-Tech Electronics maintained its final and special DPS on the back of strong operating cash flow. We expect FY21 earnings growth to remain resilient on cost control efforts.

Burn-in specialist Avi-Tech Electronics (SGX:BKY) reported a 2HFY20 (Jan 2020 to Jun 2020) headline net profit of S$2.9m (+1.1%), which was mainly bolstered by the JSS. Excluding that, core net profit of S$2.3m (-20.1% y-o-y) brought FY20 core earnings to S$5.4m (+15.6%), which came in line with our and street expectations.

Avi-Tech Electronics's 2HFY20 revenue of S$13.7m (-23.9%) was weighed by supply chain disruptions in the burn-in segment, due to the global lockdowns. Due to the lower sales mix from the relatively more profitable burn-in segment, gross profit margin slipped 1.6ppt to 32.5%.
While channel checks in the upstream segment suggest that the worst is over, on-going travel restrictions imply that orders and deliveries remain fluid at this point.

Avi-Tech Electronics's 2HFY20 core net margin improved to 16.4% (+0.8ppt). This is a strong reflection of the group’s success in improving its operational efficiency from the on-going cost control measures across all business segments, despite reduced sales from its most profitable burn-in segment.

On the back of strong operating cash flow generation, Avi-Tech Electronics maintained its final and special dividend at S$0.015, bringing FY20 total dividends to S$0.025 (FY19: S$0.023). This translates to a 78% payout ratio on core earnings, and we believe a similar S$0.025 DPS is sustainable going forward-accounting for 51-58% of FY21-22F net profit.

Over the longer term, demand for burn-in and testing services would continue to remain on the uptrend, backed by increased penetration rate and adoption of safety-related vehicular electronics systems by global car makers. Furthermore, the take-up in fail-safe components is also spearheaded by digitisation and driver assistance systems.

The continued shift in sales mix towards the more profitable burn-in services and PCBA segments is anticipated to continue, due to higher demand.
Furthermore, cost control measures and productivity enhancements are still being conducted to raise operational efficiency for the group. Hence, FY21-22F gross margin range is estimated to remain elevated in the 37-38% region, compared to 32% on average across FY18-20.

With a further S$0.1m impairment taken on Avi-Tech Electronics’s investment in Hyflux’s medium term note programme, the entire S$0.5m investment has since been fully written off. Separately, net cash pile rose 7% h-o-h and 8.8% y-o-y to S$36.7m, now constituting 49% of market cap.
With its solid operating cash generation ability, along with ongoing cost-cutting measures and efficiency improvements, Avi-Tech Electronics's net cash pile is estimated to grow at a 6.8% CAGR over the next two years to FY22F.

Due to the on-going travel restrictions, we believe order outlook remains fluid at this point. Hence, we lower our Avi-Tech Electronics's FY21 revenue expectation by 11.3% to S$32.1m, implying 9.2% y-o-y growth.
Consequently, our FY21 net profit target is reduced by 18.7% to S$6.1m, which translates to 11.1% earnings growth.
Maintain BUY on Avi-Tech Electronics with a lower target price of S$0.495 (from S$0.57), pegged to 5.7x EV/EBITDA, or 1SD above its historical average, amid the upcycle in automotive electronic components.
See Avi-Tech Electronics Share Price; Avi-Tech Electronics Target Price; Avi-Tech Electronics Analyst Reports; Avi-Tech Dividend History; Avi-Tech Electronics Announcements; Avi-Tech Electronics Latest News.
Currently, Avi-Tech Electronics trades at 4.4x 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 5.8% yield. We believe that the valuation is supported by its strong balance sheet, which includes a net cash pile of S$36.7m and a fully-paid commercial property in Singapore that is estimated at S$20m. These relatively risk-free assets provide a solid buffer for potential acquirers targeting the blue-chip customer portfolio of Avi-Tech Electronics.
Avi-Tech Electronics' share price catalyst
- Higher-than-expected factory utilisation rates for burn-in processes.
- Earnings-accretive M&A.
- Return of engineering contracts

Clement Ho UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-08-31

SGX Stock Analyst Report BUY MAINTAIN BUY 0.495 DOWN 0.570