Avi-Tech Electronics: cigar butt provides puff

Last week Avi-Tech Electronics (ticker: SGX:CT1) released results for their third fiscal quarter. The company posted a profit from continuing operations of $1.3m SGD. Revenue for the quarter was $6.1m and up 5.8% compared to Q3 2014. The liquidation of their US subsidiaries is also progressing.

All in all is was a decent result and another indication that the worst might be behind the company. After all that was the main reason I bought Avi-Tech in the first place: it was a speculative bet on a turnaround. The market liked the results as well and Avi-Tech’s stock priced moved up from about $0.09 to $0.11.

The CEO, Mr Lim Eng Hong hinted at another dividend after Q4:

“Having announced on 12 February 2015 our intention to pay an interim dividend of 0.3 cent per share, which we will be paying out on 20 May 2015, the Management and the Board will evaluate the possibility of recommending a final dividend payment if 4Q15 is profitable or if the full-year closes with respectable profit.”

Also shareholder approval will be asked for a share buyback:

“The Board will also be seeking shareholders’ approval to obtain a share buyback mandate at the EGM. Given that the current trading price of the Company’s shares is below the net asset value per share of approximately S$0.1247 (as at 31 March 2015), the share buyback mandate will provide an avenue for the Board to enhance the return on equity of the Group. It will provide the Board with greater flexibility in managing the Company’s capital structure with a view to maximising shareholder returns and facilitating the return of surplus cash to shareholders in an expedient and cost-efficient manner. In determining whether to purchase the Company’s shares, the Board will weigh all competing needs for the use of cash resources, such as the payment of dividends, operational requirements and expansion plans (if any).”

I do think investors need to keep in mind that Avi-Tech is on the SGX watchlist and one of their objectives will be to get the company to a market cap that is greater than $40m, see rule 1314. A buyback could be a way to get the company to pass this $40m market cap hurdle. Considering all this, I’m not surprised that management seems quite promotional. I even had a IR firm e-mail me after the Q2 results announcement to point me to the improved results.

The stock is trading at $0.107 and the market cap of the company is now $36.6m. Net-current asset value stands at $30.9m. The company currently trades at 1.18x NCAV and 0.86x book value.

I decided it was time for me to sell. At the current price I need to have a better grasp of the industry and a better idea of Avi-Tech’s prospects than I possess. This was always a “cigar butt” investment for me. My previous post pointed out the most important concerns I have with the management. Not much has changed my views in that department, although management did resume dividend payments and they do deserve some credit for that.

It is certainly possible that I’m selling very early here and that there is much more upside. I simply don’t understand Avi-Tech’s business and industry well enough. I bought at a point that I felt was still close to the point of maximum pessimism. After the first signs of a turnaround and the resulting increase of the share price, more knowledge is now required to be able to continue to hold.

Avi-Tech has provided a relatively quick puff of 40% and a dividend. It is a good result. Other times one is not so lucky when fishing in this pond and things don’t work out. Stephan Company and ADDvantage Technologies are two examples that come to mind where I lost money in companies I would qualify as “cigar butts”. Holders Technology might prove to be another disappointment, but I’m still holding on to that one.

Disclosure: no position in Avi-Tech Electronics, Stephan Company or ADDvantage Technologies. Long Holders Technology.

Posted in Cigar butts, Singapore stocks and tagged .

NeverLoseMoney

Author of ValueInvestingBlog.net. Private investor.

5 Comments

  1. Hi Paul,

    How do you track the announcements/news of companies you are invested in on the SGX? It seems like the only way is to manually go on the SGX website, and search for new announcements every few days?

    • I’m using a watchlist on a German site: http://www.finanznachrichten.de/. It sends out an e-mail every day and it lists new announcements of the companies on your watchlist. It works ok. The tool was buggy when I tried to add companies to the watchlist the last time I used it. Still prefer it to checking the SGX website manually though.

  2. would not call it a cigar butt. historically core business has always been healthy and steady and div has been good. only a dip from missed venture in USA.

    so it is back to being a steady cash flow++ business again.

    • It’s all in the eye of the beholder of course. I do think the business is very sensitive to the state of the semiconductor industry, which is very cyclical. Perhaps that was also a reason to diversify into these new ventures in the US.

      Business is picking up now, but I believe things can turn quickly in their industry. That’s why I felt I needed a better understanding of their business and industry to get a sense of their prospects.

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