UOB-KH had initiated coverage of Avi-Tech in Feb 2020, joining two other brokers in covering the company which is riding on the upswing of  the global semiconductor sector.


Excerpts from UOB-Kay Hian report (26 June 2020)

Analyst: Clement Ho

Industry Resilient, Demand Still High For Burn-in Specialists

The structural growth of automotive electronic components is ongoing despite the COVID-19 pandemic.

Avi-Tech

Share price:
39 c

Target: 
57 c

Channel checks indicate that demand for burn-in testing remains elevated although some supply chain-related disruptions could result in a slight dip in FY20F revenue.

Nevertheless, we reiterate BUY and target price of S$0.57.

Current price translates into an attractive entry at 2.6x FY21F EV/EBITDA and 8.9x PE.


WHAT’S NEW
Industry still in upcycle. Works at Infineon, the world’s largest automotive semiconductor manufacturer and Avi-Tech Electronics’ largest client, is healthy given the accelerating adoption of electric vehicles.

alvinlim avitech2.17Avi-Tech Chief Operating Officer Alvin Lim.
NextInsight file photo.
Despite COVID-19 headwinds and limited visibility on near term macro conditions, worldwide semiconductor billings rose by an impressive 6.4% yoy to an estimated US$136.75b for 4M20, reflecting the industry’s long-term resilience.

These positive factors should translate into continued high factory utilisation rates for Avi-Tech Electronics across FY20F and FY21F.

• Business as usual. As work scope for Avi-Tech Electronics is classified as essential services, factory utilisation rates are not impacted by the circuit breaker implemented by the government in April-May.

However, there may be potential supply chain-related disruptions due to the global lockdowns, which could have resulted in order deferrals for Avi-Tech Electronics to the following quarter.

Jobs Support Scheme to bolster bottom line. About S$0.2m could be received by the company in 2HFY20, following two pay-outs from the Singapore government in April and May.

The subsidy is expected to flow directly to the bottom line, which would help offset the slight drop in FY20F revenue.

Accordingly, we lower our FY20 net profit forecast by 5.2% to S$5.9m, but keep our FY21 net profit forecast unchanged at S$7.7m.


STOCK IMPACT
FY20 revenue forecast lowered. Due to the potential logistical delays, we have revised down our FY20 revenue forecast by 8.8% to S$31m.

FY21 net profit forecast unchanged. Revenue expansion for FY21F remains on track, in tandem with industry growth forecasted by key clients of Avi-Tech Electronics.

As the group continues to shift its sales mix towards the relatively more profitable burn-in services and PCBA segments, as well as with ongoing cost control measures and productivity enhancement, we estimate the FY20-22 gross margin range to stay elevated in the 38-39% region, compared to 28-32% across FY17-19.

Accordingly, FY21 net profit is anticipated to grow by 29.2% yoy to S$7.7m.


EARNINGS REVISION/RISK
• None.

VALUATION/RECOMMENDATION
Reiterate BUY and EV/EBITDA-based target price of S$0.57. Amid the upcycle in automotive electronic components, valuation is pegged to 1SD above its historical average EV/EBITDA of 5.7x, (also implies 12.9x PE).

Currently, Avi-Tech Electronics trades at an attractive 2.6x FY21F EV/EBITDA and 8.9x PE. It has an indicative FY21 yield of 6.4%.

• Assuming management maintains its full-year DPS of S$0.025, Avi-Tech Electronics offers an attractive 6.4% FY21F yield.

SHARE PRICE CATALYSTS
• Higher-than-expected factory utilisation rates for burn-in processes
• Earnings-accretive M&A
• Return of engineering contracts


Full report here

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