Avi-Tech, a play on the strengthening semicon industry, has garnered initiation coverage by CGS-CIMB. The target price, however, is lower than that of UOBKH: 

Excerpts from CGS-CIMB report

Analyst: William Tng, CFA

■ We initiate coverage on AVI-TECH with an Add rating and TP of S$0.422 as we believe it is a proxy for the rising semiconductor content in automobiles.


Share price:
39 c

42.2 c

■ Prospective dividend yields over FY20-22F of 6.49% are backed by strong free cash flow (limited capex) and a net cash balance sheet, in our view.

■ Accretive M&A are upside share price catalysts.

Established burn-in player
Avi-Tech Electronics Limited (Avi-Tech) was incorporated in Singapore in 1981 and listed on the Mainboard of the Singapore Exchange in 2007.

limenghong2.17CEO Lim Eng Hong. NextInsight file photoAvi-Tech is a total solutions provider for burn-in, burn-in board manufacturing and printed circuit board assembly (PCBA) and engineering services working with global original equipment manufacturers in the semiconductor, electronics and life sciences industries.

Exposure to rising semiconductor content in vehicles
Through its burn-in services and burn-in board manufacturing businesses, Avi-Tech offers investors exposure to the secular trend of growing semiconductor content in vehicles.

Strong dividend paymaster, in our view
Avi-Tech has minimal capex needs and hence, strong free cash flow generation.

The company has been paying dividends to shareholders for the past five years. Average dividend payout ratio over FY17-19 was a high 81% of net profit.

With a net cash balance sheet and an official 30% minimum payout policy, we expect Avi-Tech to continue rewarding shareholders with dividends.

Based on our estimates, dividend yields over FY20-22F are projected to be 6.49%.

Key risks
Key risks include

a) a deterioration in customer demand due to the escalation of the Covid-19 outbreak;
b) foreign exchange exposure risk (Avi-Tech has a net long US$ exposure); and
c) M&A turning sour (M&A is one of Avi-Tech’s strategy to utilise its cash balance to grow the company; the company’s previous M&A did not fare well).

Initiate with Add
We initiate coverage of Avi-Tech with an Add recommendation and a target price of S$0.422.

Our target price is based on 1.42x P/BV multiple, derived from the Gordon Growth Model (COE: 8.8%; ROE: 11.7%).

High net cash

williamtng4.14"We project dividend yields over FY20-22F of 6.49%. Note that Avi-Tech’s projected end-FY20F net cash accounted for 52% of its market cap."

-- William Tng, CFA (photo),
CGS-CIMB analyst

Downside risks are deterioration in customer demand due to the escalation of the Covid-19 outbreak.

Re-rating catalysts are accretive M&A, better-than-expected customer demand.

Full report here

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