By Kevin Tan
Tue, 22 Jun 2010, 09:22:01 SGT

Positive news in the electronics sector, especially in the semiconductor industry, point to better prospects and we believe that Avi-Tech Electronics is set to benefit from the industry upswing. While we note that there are warnings of growth rates moderating in the coming months, or even a slowdown in global semiconductor sales as communicated in our June sector report, we believe it is likely a reflection of an improving 2H09 (as compared to its trough in 1Q09) and also a reversion to historical seasonal patterns rather than a deterioration in the industry’s fundamental health. We continue to like Avi-Tech for its proven track record (almost 30 years of corporate history), strong financial position and sturdy cashflows. With the current share price presenting an attractive total expected return of 32.4% to our S$0.24 fair value (including FY11F dividend yield of 6.1%), we maintain our BUY rating on Avi-Tech.

Positive outlook from major customers. After defying a seasonal slowdown in its 3QFY10, we again see possibility in Avi-Tech Electronics to produce comparable, if not better, results for the 4Q. There has been a spate of positive news in the electronics sector in recent months, especially in the semiconductor industry, leading us to believe that the group is set to benefit from the industry upswing. For example, big chip makers such as Texas Instruments and Infineon had recently raised their forecasts amid broad-based strength in their operating segments and had guided for capacity additions to ease their loaded facilities. As they are major customers of Avi-Tech, we expect the group to gain from the increased demand as well.

Strong recovery expected in chip equipment market. The North American manufacturers of semiconductor equipment are also painting a consistently optimistic outlook. According to statistics by SEMI, orders had increased 2.8% MoM and 415.3% YoY to reach US$1.48b in May (book-to-bill ratio of 1.12), reflecting strong signs of spending in the chip-gear market. As such, we expect Avi-Tech to see a return of orders in its Engineering Services segment, which has been lacklustre in a few quarters. As a note, Gartner had again revised its 2010 capital spending growth projection to 113.3% two weeks ago, up from its previous forecast of 76.1% in March. More importantly, the Automated Test Equipment market is projected to grow by an even faster pace of 133.1%, as it makes its first year of positive growth since 2006. With Avi-Tech’s businesses predominantly in this segment, we are thus positive of its performance in 2010.

Moderating growth rates in 2H10 not likely a concern. While we note that there are warnings of growth rates moderating in the coming months, or even a slowdown in global semiconductor sales as communicated in our June sector report, we believe it is likely a reflection of an improving 2H09 (as compared to its trough in 1Q09) and also a reversion to historical seasonal patterns, rather than a deterioration in the industry’s fundamental health.

Maintain BUY. We continue to like Avi-Tech for its proven track record (almost 30 years of corporate history), strong financial position and sturdy cashflows. With the current share price presenting an attractive total expected return of 32.4% to our S$0.24 fair value (including FY11F dividend yield of 6.1%), we maintain our BUY rating on Avi-Tech.