Avi-Tech Electronics - RHB Invest 2020-04-15: Resilient Despite Disruption; Keep BUY

AVI-TECH ELECTRONICS LIMITED (SGX:BKY)

Avi-Tech Electronics - Resilient Despite Disruption; Keep BUY

Keep BUY, DCF-based SGD0.50 Target Price implies 39% upside with c.7% FY20F (Jun) yield.
Avi-Tech Electronics (SGX:BKY) reported a strong 2Q20, with PATMI surging 46.7% y-o-y to SGD1.4m. The semiconductor sector’s slowdown has likely bottomed out for the company, and its quarterly performance should improve ahead. FY20 should be a much better year, with earnings having likely bottomed in FY19.

We remain positive on Avi-Tech Electronics, and expect to see FY20F EPS up by 12% y-o-y.

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 Electronics’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. GPM improved significantly to 39.7% in 2QFY20, from 27.9% 1QFY19.
We expect it to continue booking robust numbers, as we move into 2HFY20.

As its factory is in Singapore, production is not impacted despite the “circuit breaker” introduced in Singapore to stem the spread of COVID-19. Avi-Tech Electronics is also considered a part of the supply chain for essential goods. However, we understand that its clients’ supply chain has been disrupted slightly. This may impact its FY21F performance, if the COVID-19 pandemic worsens further, with lockdowns further extended globally.

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, DPS totalled 2.3 SG cents, which translated to 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. See Avi-Tech Dividend History.
We expect management to reward shareholders with the same or more going forward, despite a special dividend given in FY19.

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 Avi-Tech Electronics. Investors have been well rewarded – if we look at its dividend trends – even when earnings were at the bottom of the cycle.
See Avi-Tech Share Price; Avi-Tech Target Price; Avi-Tech Analyst Reports; Avi-Tech Dividend History; Avi-Tech Announcements; Avi-Tech Latest News.
A key downside risk is a slowdown in the economy. The opposite situation presents an upside risk.