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


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.
  • Maintain BUY on Avi-Tech Electronics with a lower target price of S$0.495.

Avi-Tech Electronics's 2HFY20 Results

  • 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.

Burn-in orders pushed back.

  • 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.

Improving operational efficiency.

  • 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.

Final and special dividend maintained.

  • 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.

Structural growth of automotive electronic components remains underway.

  • 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.

Gross margin expansion underway.

  • 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.

Balance sheet remains strong.

  • 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.

Avi Tech Electronics - Valuation & Recommendation

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