Excerpts from RHB Research report

Analyst: Jarick Seet

burnin board2.17Semiconductor chips are loaded onto burn-in boards (above) and subjected to "stress" under high temperatures and electrical voltages to uncover those with a high likelihood of failure. NextInsight photo Avitech, a total solutions provider for burn-in, burn-in board manufacturing and printed circuit board assembly (PCBA), has successfully recovered from its M&A mishap, and is now in a prime position to ride on the world’s march towards smart cities and digitalisation.

Avitech is on track to record stable YoY NPAT growth of 10- 15% in FY17F-18F, with a strong balance sheet (net cash of over SGD31m or 50% of its market cap). The stock is trading at undemanding valuations – FY18F ex-cash P/E of only 4.4x.


Share price:
40 c

52 c

We initiate coverage on Avitech with BUY, and a DCF-derived TP of SGD0.52 (30% upside).

Smart cities and technological upgrades to boost demand. Avi-Tech Electronics’ (Avitech) 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.

limenghong2.17Lim Eng Hong, CEO and founder of Avi-Tech Electronics. Photo by Leong Chan Teik With other disruptive technologies in the Internet of things (IoT) era, and the march towards cloud businesses and smart cities, we believe another wave of demand for semiconductor burn-in and other related services is coming, which would be a further boost to the group.

Positive long-term growth prospects. We believe that its long-term growth prospects are positive, in line with the macro trend of digitalisation. As a result, we view that a conservative and stable annual NPAT growth rate of 10% would be sustainable at Avitech over the longer term.

SGD31m war chest for M&As
JarickSeet11.14"With a SGD31+m war chest at their disposal, management is looking at accretive acquisitions and new avenues of growth, which would fit synergistically with its existing service offerings. We believe that Avitech would learn from its past mistakes and utilise its cash more efficiently this time round. With accretive acquisitions, it would be able to enhance NPAT drastically, with a combination of debt and cash financing, in our view."

-- Jarick Seet (photo)

50% payout ratio + possible special dividend. As of 2QFY17, management implemented a dividend policy to pay out at least 30% of total profit, suggesting its positive outlook and strong intent on returning value to shareholders.

In fact, Avitech has a track record of paying out at least 50% of its NPAT over the past few years, and management has highlighted that it would likely maintain the ratio going forward.

With the positive outlook coupled with a strong cash balance, we believe that there may be a potential special dividend in FY17 to reward shareholders – this would likely boost FY17F yield to c.6.5-10%.

Initiate coverage with BUY and DCF-derived TP of SGD0.52. Avitech is on track to record stable YoY NPAT growth of 10-15% pa over FY17F-18F, with a strong balance sheet representing net cash of over SGD30m (50% of its market cap).

The stock is trading at undemanding valuations, with FY18F ex-cash P/E of only of 4.4x. We have a DCF-derived TP of SGD0.52 (WACC: 12%, terminal growth: 0%), which implies FY18F ex-cash P/E of 5.7x. Key risks include substandard M&A acquisitions, and an economic slowdown.

Full report here. 

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