AVI-TECH ELECTRONICS LIMITED (SGX:BKY)
Avi-Tech Electronics - Improving Outlook Ahead; Stay NEUTRAL
- NEUTRAL, new DCF-based Target Price of SGD0.31 from SGD0.27, 7.4% FY20F (Jun) yield.
- The deceleration in the semiconductor sector will likely slowly improve in subsequent quarters. AVI-TECH ELECTRONICS LIMITED (SGX:BKY)’s engineering segment will remain weak in subsequent quarters, but an improvement in the trade war situation should be a key positive catalyst. As such, we expect FY20 to be better than FY19, and lift our target price after increasing FY20-21F earnings by 5%.
7.4% dividend yield with improving fundamentals.
- With a net cash balance sheet and a strong operating FCF, we believe Avi-Tech Electronics’ management will continue to reward shareholders with attractive dividends despite the drop in profits.
- For FY19, it declared a total DPS of 2.3 cents – which implies a PATMI payout ratio of 84.7%. We expect the ratio to be the same or even higher going forward, and estimate a FY20F yield of 7.4%. See Avi-Tech Electronics' dividend history.
Long-term growth prospects still intact.
- We believe Avi-Tech Electronics’ long-term growth prospects are still intact, in line with the digitalisation and macro-economic trends, as well as the increase in usage of electronics in the automotive sector. This, is on top of Smart City initiatives commencing 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 partially also due to the fact that the majority of its burn-in customers are from the automotive sector.
Sector correction seems to have bottomed.
- With a slowdown in the sector happening since 2018, we expect the sector correction to have hit a bottom. The industry’s outlook should improve, especially if there is a positive outcome from talks to be held between China and the US in October.
- We expect Avi-Tech Electronics’ earnings to improve in the subsequent quarters, especially in 1Q20F.
- Avi-Tech Electronics is also backed by an attractive FY20F dividend yield of 7.4%, and management is actively exploring M&A opportunities – on which they hope to be able to close one by 1H20. Any potential earnings-accretive M&As should be a positive.
- With a net cash balance sheet and good dividends, we remain NEUTRAL on the stock, as we think investors can be rewarded by attractive dividends while awaiting a turnaround. Valuations have also come down significantly, and the downside is likely limited from here onwards.
- The key downside risk is a slowdown in the economy. The opposite uld present an upside risk.
Jarick Seet
RHB Securities Research
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Lee Cai Ling
RHB Invest
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https://www.rhbinvest.com.sg/
2019-09-10
SGX Stock
Analyst Report
0.31
UP
0.270
