Excerpts from RHB report
Analyst: Jarick Seet & Lee Cai Ling
|Upcoming Results Should Be Positive; Keep BUY
• Maintain BUY, unchanged DCF-based SGD0.50 TP, 9% upside with c.6% FY20F (Jun) yield. The semiconductor sector’s slowdown has likely bottomed out, and Avi-Tech Electronics’ quarterly performance is expected to improve ahead.
We expect net profit for 2H20 to be robust.
Avi-Tech 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.
"We expect it to continue booking robust numbers, as we move into 2HFY20.”
Avi-Tech’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 it 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.
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.
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.
Full report here.
Visit to Avi-Tech at Serangoon North Ave 5.