• Maintain NEUTRAL, new DCF-derived Target Price of SGD0.38 from SGD0.43, 5% downside.
• After attending Avi-tech’s briefing, we understand that its engineering division will likely take about six months to ramp up again. The semiconductor sector slowdown has impacted its engineering segment.
• Going forward, its burn-in service business should continue to grow steadily, but profitability will likely be muted due to the engineering unit’s weak performance.
• Management expressed interest in rewarding shareholders with good dividends – since its cash flow and balance sheet are still healthy – with an attractive FY19F yield of 7.7%.

Burn-in Services Still Growing

As Avi-Tech mainly provides burn-in services for chipmakers in the automotive sector, where there has been gradual and steady growth. 

We expect the burn-in business to continue to grow by 10-15% pa, and not be impacted by the slowdown in the semiconductor sector. This is partly due to the fact that the majority of their burn-in customers are from the automotive sector, which is enjoying steady growth.

Engineering Segment to Pick Up Slowly

• In 2HFY18, its engineering segment took a hit due to delays in customer projects as well as a slowdown in orders from clients. This led to the unit booking a loss, which dragged down Avi-Tech’s overall profitability. ~ SG investors .io ~ Where SG investors share
• However, management believes that the segment has likely hit a low already, and business will likely pick up from here, with new customers being secured at the same time. However, it will likely take about 6-9 months to ramp up. As such, the engineering business will likely continue to be a drag on profitability in FY19 – albeit to a smaller extent.

Supported by Attractive Yield of 7.7%

Management has shown in the past that it is willing to reward shareholders with attractive dividends. 

We think it will likely keep the dividend payout ratio at 90% and above as they did in FY18, as Avi-Tech has a net cash balance and strong operating FCF. With the anticipated recovery in earnings, we like that the stock has an attractive 7.7% yield for FY19F.

Maintain NEUTRAL, Due to Sector Slowdown

With a slowdown in the sector, as seen in results released by its peers, we maintain NEUTRAL on the counter. We also cut our Target Price to SGD0.38 from SGD0.43, as we reduce FY19-20F earnings by 7% and 6%

The stock is, however, backed by an attractive FY19F yield of 7.7%, and management is actively exploring M&A opportunities. Any potential earnings- accretive M&As (given its war chest of SGD32m) would be a positive for shareholders.

Key downside risks to our call include a slowdown in the economy and the semiconductor sector, while the opposite conditions present upside risks.

Source: RHB Invest Research - 12 Sep 2018