kennethkohwk
- Jan 10, 2017

AVI-TECH (AVISC.SG) is a Value play! Potential double digit gain.

Hi folks, we are always in the mood for Alpha.

Here's a good value trade you might want to consider. We think the stock is undervalued using a couple of measures, and what's missing for re-pricing is just awareness. Possible 30%+ upside.

Avi-Tech (AVISC.SG) in the Singapore Stock Exchange is in the semiconductor test part of the semicon value chain. The particular test it does is called "burn-in". Burn-in is a stress-test of semicon chips that perform mission critical functions (life/death, systemic) or are part of machines that are expensive to replace. Key drivers to burn-in demand are the electronification of cars and data centres.

Demand - Automobile semicon chips MUST do 100% burn-in for safety reasons - Secular industry 9% growth trend of semicon content in automobiles - Trend just started, only in the luxury segment, not yet mass market. - Self driving cars to enhance the trend even more - Auto demand is less cyclical - 50% of AVT's overall revenues is auto semicon related - So long as AVT's customers maintain key positionings in semicon auto, AVT will ride their growth. - Another secular trend is cloud computing chips, as these are mission critical, needs 100% burn-in as well.

Supply - Tight competitive space: Only 3 main players in SEA: AVT, KESM, Trio-Tech - Barrier to entry: it takes 6mths to 1yr to be qualified to do burn-in services. Unlikely a new player will buy machines and hire engineers from competitors, especially as existing players like AVT are almost fully depreciated and have engineering expertise to maintain machines without heavy capex.

Low switching cost risk: as burn-in test is a very small part of overall cost of semicon chip, there is not much reason to switch burn-in service provider, especially as the chips are performing critical functions. - Low cost advantage: as the trend is toward outsourcing foundry and test, semicon majors have no cost nor expertise advantage to do large scale burn-in in-house. Also, AVT's machines are nearly fully depreciated.

Financials: Operating cash is high (FY15,16: 4.7m, 7.9m) while maintenance capex (FY15,16: 1.6m, 1.0m) is low = free cash generation - Dividend yield is 6.4% Valuation table - AVT's Net Margin, ROA, ROE, vs KESM and Trio-Tech is comparable - AVT (18.3%, 11.8%, 13.7%) - KESM (10.7%, 8.3%, 10.7%) - TT (2.3%, 2.4%, 4%) - Mkt Cap AVT, KESM, TT (SGD 47.9m, 138m, 17m) - Yet AVT trades at 8x Trailing 12M PE vs KESM and TT both at 14x Trailing 12M PE. - KESM and TT valuations seem to reflect the steady secular growth/low cyclicality trend the proxy. AVT should be a catch up as there is no reason for the discount except for awareness.

Any reversion to the peers valuation implies a more than 30% upside on the longer term. Short term technical target is at 36 cents on breakout from consolidation.