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OCBC Investment Research says expect a banner year for semicon industry

Analyst: Kevin Tan

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Avi-Tech (16.5 c) has a 50% upside to OCBC Investment Research's target price of 24 cents.


Good 1Q10 results. Consistent with our view expressed in our sector report dated 9 Apr, both semiconductor companies under our coverage had recently turned in strong quarterly results, driven by healthy sales momentum and recovery in economic conditions.

For Avi-Tech Electronics, earnings
were as expected as growth in its Burn-In Services and Board Manufacturing segments more than offset the slower pick-up in Engineering Services segment.

For Micro-Mechanics, earnings surpassed our expectation as
the group benefited from sustained activity in its semiconductor tooling segment and recovery in Custom Machining & Assembly segment, as well as from better operational efficiency. We view this positively as the results may mean that the companies have already started to turn the corner and are now on path to earnings recovery.

More affirmative outlook. Indeed, both Avi-Tech and Micro-Mechanics, we note, have become markedly positive on their outlook for 2010, saying that they have been seeing a healthy level of customer orders and are expecting to further progress in their core segments in the coming quarters. While they anticipate volatility in demand patterns, forex rates and operating expenses going forward, both companies are confident of weathering the uncertain economic climate and capture any sales opportunities that arise.

Chip sales to experience remarkable growth. Our checks on the recent 2010 global semiconductor revenue growth forecasts by various market watchers also showed that they expect the industry to achieve a remarkable growth this year. While research firms had offered widely different views on the industry growth rate in past two quarters, we observe that recent forecasts by a number of them converged around the 31% level. This growth rate is stronger than their previous forecasts and our growth assumptions for both companies under coverage.

As such, we see upside potential to
our earnings forecasts on these companies, should they perform in line with industry expectations. In addition, we note that Singapore's total fab capacity is likely to increase 6.8% in 2010, based on projections by SEMI.This should help to bolster demand for services provided by both Avi-Tech and Micro-Mechanics.

Maintain OVERWEIGHT. We are maintaining our OVERWEIGHT view on the semiconductor industry. We also keep our BUY ratings on Avi-Tech (S$0.24 fair value) and Micro-Mechanics (S$0.57 fair value), as we see them as strong beneficiaries of the industry upswing.

We believe the current
market weakness is an opportune time to accumulate the stocks. Both companies are in strong net-cash positions and offer attractive FY11F yields of 8-9%.


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Kim Eng Research says BREADTALK is down but not out, reiterates ‘buy’

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George Quek, founder and chairman of BreadTalk


Though BreadTalk maintained its double‐digit revenue growth, its 1Q10 net profit (‐64% yoy) fell short of our expectations due to the underperformance of its PRC food court operations, start‐up costs and high tax rates. We believe this is a short‐term blip and remain positive on the long‐term growth prospects of its prime F&B network. Reiterate BUY on a lower TP of 70 cts.

Our View    

The bakery segment stayed robust as EBIT grew by 33% yoy. With the strong demand and scalable business model, we are confident that the segment will remain a source of steady recurrent income. We expect the restaurant business to recover in the next 12 months when Ramen Play and Carl’s Junior start to contribute.      

Streamlining of its China food courts and net store expansions should enhance operating efficiencies and translate to faster earnings momentum in 2H10. We regard the streamlining exercise as a positive move to maximise growth potential in the lucrative China market, which could be worth multiple times its business in Southeast Asia.    

More importantly, operating cash flow stays healthy, if not higher – $1.3m in 1Q – and the group is in a net cash position of $28m. This track record of generating positive operating cash flow, even amid a crisis, speaks well of its defensive earnings model and good business progress.

Action & Recommendation

We cut our earnings estimates by 17% for FY10 to factor in the weak 1Q10 and higher start‐up costs. Active share buyback by the group and its key shareholder raising its stake reflect a strong vote of confidence in the stock.

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