• Keep NEUTRAL with a lower DCF-backed Target Price of SGD0.30, from SGD0.34, as we lower FY19F (Jun) and FY20F earnings by 4% and 5%.
• As guided in our previous reports (see Avi-Tech Electronics - RHB Invest 2018-11-13: Engineering Slowdown Continues), the slowdown in the semiconductors sector impacted Avi-Tech negatively and will likely continue to hit its engineering segment in the following quarters.
• PATMI for 2Q19 dropped 42.7% y-o-y to SGD1m, mainly due to losses in the engineering segment. Going forward, we expect the burn-in service to grow steadily however, the overall profitability will likely be muted, due to a weak performance of its engineering division.

Positive Long-term Growth Prospects

• We believe AVI-TECH ELECTRONICS LIMITED (SGX:BKY)’s long-term growth prospects look good, in line with an increase in smart city initiatives around the region, growth of electronics in the automotive sector and digitalisation trends.
• Avi-Tech provides mainly burn-in services for chipmakers in the automotive sector, where there has been a gradual and steady growth. We expect the burn-in segment to continue to grow 5-10% pa and not be impacted by the slowdown in the semiconductor sector, partially as the majority of Avi-Tech’s burn-in customers is in the automotive sector which is enjoying a steady growth.

Dividend Yield of 6%

• With a net cash balance sheet and a strong operating free cash flow, we think management will continue to reward shareholders with attractive dividends, despite a drop in profits.
• We are projecting a 6% yield for FY19F, via a 75% PATMI payout ratio.

Maintain NEUTRAL Due to Semiconductors Sector Slowdown

• With a slowdown in the sector, as seen in results released by its peers in the sector, we think Avi-Tech’s earnings will continue to suffer this year.
• In addition, its engineering division will likely incur more losses this year due to a significant drop of orders from customers. As a result, we maintain NEUTRAL on Avi-Tech with a lower DCF-backed Target Price of SGD0.30, as we lower FY19F and FY20F earnings by 4% and 5%.
• The stock is however backed by an attractive FY19F yield of 6%, and management is actively exploring M&A opportunities. Any potential earnings accretive M&A would be a positive for shareholders.

Key Risk

• A slowdown in the economy.

Source: RHB Invest Research - 14 Feb 2019