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SAC optimistic on Avi-Tech but does not give formal rating

·2-min read

SAC notes that Avi-Tech's recovery is tied to the prospects of the automotive semicon sector, which is expected to grow.

SAC Capital has initiated coverage on Avi-Tech Holdings with a non-rating, although it is generally positive on the stock.

Analyst Lim Shu Rong says that Avi-Tech’s recovery is tied to the automotive semiconductor market, and specifically to one of its main customers, Infineon Technologies.

Infineon engages  burn-in services for its production in Malaysia, and has lifted its FY2022 revenue forecast to EUR13 billion, up 18% y-o-y.

The market leader in automotive semiconductors also expects sales of its automotive products to exceed its full-year revenue growth rate.

On a broader view, Lim says electrification of vehicles and autonomous driving are key drivers that will lift demand for automotive semiconductors in the long term, given that the automotive market makes up 50% of Avi-Tech’s revenue.

The global EV market is expected to grow at a CAGR of 41.8% from 12.7 million units in 2021 to 106.6 million units in 2027, which will also increase demand for automotive semiconductors.

An EV also requires approximately double the number of chips compared to an internal combustion engine vehicle.

The growing demand is affirmed by Infineon’s move to expand its Kulim factory in Malaysia in 2HFY2022.

Lim highlights that this will increase production capacity for power semiconductors, which will consequently bring in additional revenue of EUR2 billion.

Separately, Lim notes that current development in self-driving technology uses the so-called “advanced driver assistance system (ADAS)”, which engages a broad array of semiconductor devices like sensors and processors.

Only about 10% of vehicles on the road globally were installed with ADAS in 2020, and Lim said that a fully automated vehicle would involve more semiconductor applications, increasing the number of chips to be installed.

Furthermore, Lim sees that Avi-Tech’s dividend is sustainable given the management’s capability to maintain positive operating cash flow for the past years, as well as the years going forward

M&A opportunities, she says, are also “on the cards” as the company has also accumulated a net cash balance of $19 million ending 1HFY2022, which management seeks to deploy to stimulate growth.

Some risks for the company, Lim says, are worsening chip shortages, and concentration risk.

As at 1.35pm, shares of Avi-Tech traded at 33 cents, with a FY2022 price to earnings ratio of 9.2 and dividend yield of 7.8%

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