Avi-Tech Electronics - RHB Invest 2019-11-18: Riding The Semiconductor Upcycle; Keep BUY

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AVI-TECH ELECTRONICS LIMITED (SGX:BKY)

Avi-Tech Electronics - Riding The Semiconductor Upcycle; Keep BUY

• Maintain BUY, DCF-based Target Price of SGD0.41, 11% upside with c.6% FY20F (Jun) yield.
• AVI-TECH ELECTRONICS (SGX:BKY) reported a strong 1Q20F, with PATMI surging 98.3% y-o-y to SGD1.71m. See Avi-Tech Announcements.
• The slowdown in the semiconductor sector has likely bottomed out for Avi-Tech, and results should improve in the subsequent quarters. As such, we expect FY20 to be a much better year, with earnings having likely bottomed in FY19.

6.2% dividend yield with improving fundamentals.

• With a net cash balance sheet and strong operating FCF, we believe management will continue to reward shareholders with attractive dividends despite the drop in profits.
• For FY19, a DPS of 2.3 cents (SG) was declared, representing a PATMI payout ratio of 84.7%. We expect the ratio to remain level or increase, which should imply a FY20F yield of 6.2%. See Avi-Tech Dividend History.

Stronger quarters ahead.

• With the sector decelerating since 2018, we expect this correction to have hit a bottom. As such, Avi-Tech’s outlook should improve ahead – especially if a positive outcome emerges from talks between China and the US.
• We expect Avi-Tech’s earnings to improve in the subsequent quarters, as it has seen some pick-up in orders from the manufacturing and engineering segment. This, coupled with cost-cutting measures previously done, will likely help widen margins – as fully justified in view of its strong 1QFY20 performance.

Maintain BUY, with a 6.2% yield.

• Avi-Tech is backed by an attractive FY20F yield of 6.2%, and management is actively exploring M&A opportunities – on which it hopes to close a deal by 1HFY20. See Avi-Tech Share Price; Avi-Tech Target Price; Avi-Tech Dividend History.
• Any potential earnings-accretive M&As should be a positive.
• With a net cash balance sheet and good dividends, we are positive on the stock, as investors can be rewarded well – as evidenced by the company’s track record of paying attractive dividends even during times when earnings were depressed.
• The key downside risk is a slowdown in the economy. The opposite d present an upside risk.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2019-11-18

SGX Stock Analyst Report BUY MAINTAIN BUY 0.410 SAME 0.410