September 10, 2019

The deceleration in the semiconductor sector will likely slowly improve in subsequent quarters. Avi-Tech Electronics’ 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 TP after increasing FY20-21F earnings by 5%.

With a net cash balance sheet and a strong operating FCF, we believe 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

We believe Avi-Tech’s long-term growth prospects are still intact, in line with the digitalisation and macroeconomic 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.

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’s earnings to improve in the subsequent quarters, especially in 1Q20F. The stock 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 with new DCF-based TP of S$0.31 on the stock, as we think investors can be rewarded by attractive dividends while awaiting a turnaround. – RHB

Avi-Tech Electronics closed at: S$0.31