Avi-Tech looks compelling from a numbers perspective. At a market cap of $72.5m, the stock trades at just 1.1x its book value of 18.7 cents a share, of which 13 cents alone is net cash. Further, if we strip out its cash, its PE falls to a more interesting 5-6x (versus 13.5x based on reported FY Jun 2009 earnings). Note that this is despite FY09 being a poor year with profit at just 35% of its FY07 peak).

In comparison, most of its peers have lost money, including another burn-in service provider Sunright. The only other profitable peer – Micro-Mechanics – trades at 21x current year earnings and 13x forward earnings compared to Avi, which trades at 12x and 10x respectively. Forecasts are from Bloomberg consensus.

Even in FY09, when revenue and profit plunged by 58% and 54% respectively, and burn-in capacity utilisation fell to just 20%, it was able to stay profitable and cashflow positive. In fact, it has so much cash now that it is able to repay its suppliers early in exchange for discounts. Its good cashflow has also allowed the company to pay generous dividends since it listed in 2007. There is no fixed dividend policy but in FY08, it paid 2.5 cents in ordinary dividends (72% payout) and 1 cent in FY09 (64% payout). Assuming a 1 cent dividend is sustainable, the stock yields 5% at the current level.
Besides a recovery in burn-in, Avi-Tech has an opportunity to grow its burn-in boards business. Burn-in boards are the trays used in the burn-in process and are a significant investment for its customers. Avi-Tech is already supplying high-power boards (capable of testing parts up to 200 watts compared to the normal 4-5 watts of ordinary boards) to customers in the US and has recently landed a new potentially major account. While this business was not profitable in the last two years (small losses), a turnaround with the help of the new accounts is possible.

In addition, Avi has also identified green products such as energy saving LED lights for its system integration division to manufacture and sell under its own brand, for which a US wholesale channel has been secured. According to the management, these relatively new business, which contributed $2m in sales in FY09 (<10%), could expand to several million dollars in FY10.

In addition, with its cash hoard, Avi is exploring several opportunities to acquire companies with synergistic businesses in the areas it is familiar with. None has been firmed up yet but management has been pursuing this avenue since last year. We understand that it is interested in at least a controlling stake and will not spend more than half of its cash.