Avi-Tech Electronics - RHB Invest 2019-07-16: Outlook Lacks Shine; Stay NEUTRAL


Avi-Tech Electronics - Outlook Lacks Shine; Stay NEUTRAL

  • NEUTRAL, new DCF-based Target Price of SGD0.27 from SGD0.30, 2% downside.
  • The slowdown in the semiconductor sector has impacted Avi-Tech Electronics (SGX:BKY), and should continue to affect its engineering segment in subsequent quarters.
  • While the Street previously anticipated an increase in orders for the sector, we believe this is not likely to happen. As such, our FY20-21F PATMI drops by 7%, which decreases our target price as well. That said, Avi-Tech Electronics’s FY19F yield of 6.5% remains attractive.

6.5% yield while waiting for turnaround.

  • 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. The company can likely pay up to 100% of profit as well, due to its strong balance sheet. See Avi-Tech Electronics' dividend history.
  • We project a 6.5% yield for FY19F, via a 75% PATMI payout ratio.

Long growth still.

  • We believe Avi-Tech Electronics’ long are still intact, in 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 – partially also due to the fact that the majority of its burn-in customers are from the automotive sector.

Sector not happening.

  • With a in sector, as seen in by peers, we expect Avi-Tech Electronics’ earnings to continue being under pressure this year. Also, its engineering division will likely incur more losses this year on the significant drop in orders.
  • While there was previously an semiconductor sector in 2H, we believe this out. As such, we trim FY20-21F earnings by 5%, which results in a lower DCF-based Target Price of SGD0.27.
  • The stock is, however, backed by an attractive FY19F yield of 6.5%, and management is actively exploring M&A opportunities. Any potential earnings-accretive M&As should be a positive. We remain NEUTRAL on the stock
  • Key downside risk is a slowdown in the economy. The opposite situation sent an upside risk.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2019-07-16
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 0.27 DOWN 0.300