Avi-Tech is one of 12 top stock picks for 2018 by RHB Research. Excerpts from RHB Research report.
Analyst: Jarick Seet
Long-Term Demand Intact
We remain positive on Avi-Tech’s outlook which would likely benefit from the increased use of electronics in the automotive sector as well as IoT. With net cash of SGD32.4m, we think that there is a high possibility it would likely acquire an accretive target in the near term.
With the recent correction in its share price, the company’s valuation now looks attractive, especially as compared to its Malaysian-listed peers. In addition, the stock offers an attractive FY18F dividend yield of 5.2%. We reiterate a BUY rating with a SGD0.59 TP (34% upside).
Positive long-term growth prospects. We believe that Avi-Tech’s long-term growth prospects are positive, in line with the digitalisation macroeconomic trends and increased electronics in the automotive sector. As a result, we view that a conservative and stable annual NPAT growth rate of 10-15% would be sustainable over the longer term.
Strong growth in two of its business segments. Avi-Tech’s revenue increased 31.3% YoY to SGD11.1m, driven by a 61% and 14% YoY growth in its manufacturing and printed circuit board assembly (PCBA) services, and its burn-in services respectively.
Gross profit margin decreased from 29.54% in 1Q17 to 26.41% in 1Q18. The decrease was mainly due to higher revenue contributed by the manufacturing and PCBA services business segment, which yields a lower gross profit margin.
Over SGD32m war chest for M&As. With a SGD32m 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 its cash more efficiently going forward.
With an accretive acquisition, Avi-Tech would be able to enhance NPAT drastically, with a combination of debt and cash financing, in our view.
Smart cities and technology upgrades to boost demand. Avi-Tech’s burn-in services segment is well-positioned to benefit from the rising sophistication of vehicles and, ultimately, the advent of driverless vehicles, in our view.
With other disruptive technologies in the IoT era and march towards cloud businesses and smart cities, we believe another wave of demand for semiconductor burn-in and other related services is coming. This ought to be a further boost to the group.
Long term growth on track with M&A as a bonus. Going forward, we expect the growth for FY18 to be stable, around 10-15% pa.
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