Excerpts from RHB report
Analysts: Jarick Seet
• Keep BUY with a new DCF-based SGD0.50 TP from SGD0.44, 28% upside with c.6% FY20F (Jun) yield. Avi-Tech Electronics reported a strong 2Q20, with PATMI surging 46.7% YoY to SGD1.4m.
FY20 ought to be a much better year, with earnings having likely bottomed in FY19. We remain positive on the stock, and lift our TP after adjusting FY20F EPS by +12%. |
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• Likely a strong FY20F, led by the burn-in revenue segment. With the sector slowdown in effect since 2018, we believe the correction has bottomed – so the outlook should improve, especially with China and the US having struck a Phase 1 trade deal.
Avi-Tech’s performance should continue to pick up in 2HFY20, with strong growth from burn-in services, which has much higher gross margins.
This, coupled with previously done cost-cutting measures, should help improve margins as well.
The company’s gross margin improved significantly to 39.7% in 2QFY20 from 27.9% 1QFY19.
We expect it to continue charting strong performances as we move into 2HFY20.
• 6.4% yield with improving fundamentals. With a net cash balance sheet and strong operating FCF, management should continue to reward shareholders with attractive dividends despite the drop in profits.
For FY19, a total of 2.3 cents DPS was declared, translating into a PATMI payout ratio of 84.7%.
A higher interim DPS of 1 cent was paid in 2QFY20 vs 0.8 cents a year ago due to its strong performance.
We expect management to reward shareholders with the same or more going forward, despite a special dividend given in FY19.
 Avi-Tech CFO Joseph Wang | COO Alvin Lim | CEO Lim Eng Hong. NextInsight file photo.• We maintain our call. Other than its handsome yield, management is actively exploring M&A opportunities and hopes to close a deal by end 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. This is because investors have been well rewarded – if we look at its dividend trends – even when earnings were at the bottom of the cycle. |
• The key downside risk is a slowdown in the economy. The opposite situation would present an upside risk.
Full report here.
