Excerpts from RHB report

Analysts: Jarick Seet & Lee Cai Ling

Upgrade to BUY from Neutral, DCF-based TP to SGD0.41 from SGD0.31, 17% upside, 6.6% FY20F (Jun) yield. We think that the slowdown in the semiconductor sector has likely bottomed out for Avi-Tech and results look likely to improve in the subsequent quarters.


Share price:

41 c

As such, we expect FY20 to be a much better year after earnings likely bottomed in FY19.

We upgrade to BUY with new DCF TP after increasing FY20F and FY21F earnings by 7% and 6%.

6.6% yield with improving fundamentals.

With a net cash balance sheet and a strong operating FCF, we think management will continue to reward shareholders with attractive dividends despite the drop in profits.

For FY19, a total of 2.3 cents has been declared, representing a PATMI payout ratio of 84.7%. We expect the same or more going forward, which would present FY20F yield of 6.6%.

• Long-term growth prospects still intact. We believe Avi-Tech’s long-term growth prospects are still intact, in line with the digitalisation and macroeconomic trends and increased electronics use in the automotive sector, coupled with Smart City initiatives around the region.

As it mainly provides burn-in services for chipmakers in the automotive sector – where there has been gradual and steady growth – we expect the burn-in segment to continue to grow at 5-10% pa, and not be impacted by the slowdown in the semiconductor sector.

This is also partially due to the fact that the majority of its burn-in customers are from the automotive sector.

• Strong 1QFY20 ahead. With a slowdown in the sector happening since 2018, we expect the sector correction to have hit a bottom, with an improving outlook ahead, especially if there is a positive outcome from the talks between China and the US in October.

We expect Avi-Tech’s earnings to improve in the subsequent quarters, especially 1QFY20F, as it has seen some pick-up from the manufacturing and engineering segments, coupled with cost-cutting measures previously done, which will likely help to improve margins as well.

AVITech panel 1.17Avi-Tech CFO Joseph Wang | COO Alvin Lim | CEO Lim Eng Hong. NextInsight file photo.
• Upgrade to BUY, accompanied by 6.6% yield. The stock is backed by an attractive FY20F yield of 6.6%, and management is actively exploring M&A opportunities – of which they hope to be able to close one by 1H20.

Any potential earnings-accretive M&A should be a positive.

With a net cash balance sheet and good dividends, we are positive on the stock as we think that investors can be rewarded by attractive dividends – as shown by the management’s track record of paying out attractive dividends even during the bottom cycle of earnings.

• The key downside risk is a slowdown in the economy. The opposite situation would present an upside risk.

Full report here.

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