Avi-Tech Electronics - RHB Invest 2020-07-24: Upcoming Results Should Be Positive; Keep BUY


Avi-Tech Electronics - Upcoming Results Should Be Positive; Keep BUY

  • The semiconductor sector’s slowdown has likely bottomed out, and Avi-Tech Electronics’ quarterly performance is expected to improve ahead. FY20F should be a much better year, with earnings having likely bottomed in FY19. We expect net profit for 2H20 to be robust.
  • Avi-Tech Electronics is scheduled to announce its results in the later part of August.

Burn-in testing for automotive component still growing strongly.

  • With the sector slowdown – in effect since 2018 – has bottomed and the outlook should improve going forward. Avi-Tech Electronics (SGX:BKY)’s performance should continue to pick up in 2HFY20, with strong growth from burn-in services, which has a much higher GPM. This, coupled with previously-done cost cuts, should help improve margins as well.
  • Its GPM improved significantly to 39.7% in 2QFY20, from 27.9% 1QFY19. We expect Avi-Tech Electronics to continue booking robust numbers, moving into 2HFY20.

Staying alive with net cash in a critical industry.

  • With a net cash balance sheet and strong operating FCF, management should continue to reward shareholders with attractive dividends, despite the drop in profits in the previous year.
  • Being in the burn-in and testing segment of the semiconductor industry mainly for the automotive sector, it is also in a crucial part of the supply chain – where demand for its services is still growing, despite the COVID-19 pandemic.

Attractive c.6% yield for FY20F.

  • For FY19, management declared a total DPS of 2.3 SG cents, translating to a PATMI payout ratio of 84.7%. A higher interim DPS of 1 cent was paid in 2QFY20 vs 0.8 cent a year ago, due to its strong performance. See Avi-Tech Dividend History.
  • We expect management to reward shareholders with the same level of dividends or more going forward – on top of the special dividend given in FY19.

M&A opportunities available at such drastic times.

  • Other than its handsome yield, management is actively exploring M&A opportunities and hopes to close a deal in the near future. Any potential earnings-accretive M&A should be a positive.
  • Maintain BUY on Avi-Tech Electronics, unchanged DCF-based SGD0.50 Target Price, 9% upside with c.6% FY20F (Jun) yield.
  • See Avi-Tech Share Price; Avi-Tech Target Price; Avi-Tech Analyst Reports; Avi-Tech Dividend History; Avi-Tech Announcements; Avi-Tech Latest News.
  • With a net cash balance sheet and good dividends, we are positive on the stock. This is because investors have been well rewarded – if we look at its dividend trends – even when earnings were at the bottom of the cycle
  • A key downside risk is a slowdown in the economy. The opposite situation presents an upside risk.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2020-07-24
SGX Stock Analyst Report BUY MAINTAIN BUY 0.500 SAME 0.500