Further slowdown expected. Since our update on Avi-Tech last December, we note that the semiconductor industry slowdown has continued accelerating due to weakening market conditions. A significant drop in IC demand, which is largely consumer driven, has resulted in lower burn-in and related services for its semicon customers. As such, Avi-Tech is now guiding its burn-in segment to decline both YoY and QoQ in 2QFY09. Its engineering services segment revenue is also expected to fall similarly, due to weaker demand from the semicon makers. Fortunately, management has sparked optimism within its manufacturing segment, saying that it is expecting to see greater contribution in 2QFY09. Avi-Tech, which has started to provide manufacturing services on high-power burn-in boards for its US customers since May 2007, has been seeing meaningful production orders upon qualifications. This should help to buffer the slowdown, at least to a small extent.

2009 likely to be worse than 2008. Generally, Avi-Tech has communicated poor visibility for its products/services, and acknowledges that its near-term profitability is likely to be affected. Industry outlook by market watchers have also signaled a 2009 that is potentially worse than 2008. In the latest report by Gartner, global semicon sales is expected to show a record QoQ decline of 24.4% in 4Q08, surpassing the 20% decline set in 2Q01. In addition, semicon revenue is forecasted to decline 4.4% in 2008 and a further 16.3% in 2009. This contrasts significantly to its previous forecast made in mid-November 2008, where semicon was expected to grow 0.2% in 2008 and fall 2.2% in 2009.

Maintain SELL. Despite the negative outlook, Avi-Tech remains unfazed, as it has already in place a long-term strategy to ensure sustainable growth and profitability. Moreover, even with the market weakness, the company maintains that it is not losing any customers and that all segments remain profitable. In fact, it has revealed that its business initiatives with the medical/life sciences customers has started to contribute positively and that its net cash position has improved slightly from S$44.3m as of 1QFY09.

However, as the deteriorating market is likely to weigh on its profitability and share price, we again pare our FY09F revenue by 4.4% and maintain our S$0.07 fair value, based on 4x FY09F EPS. Maintain SELL.