• NEUTRAL, new DCF-based Target Price of SGD0.31 from SGD0.27, 7.4% FY20F (Jun) yield.
• The deceleration in the semiconductor sector will likely slowly improve in subsequent quarters. AVI-TECH ELECTRONICS LIMITED (SGX:BKY)’s 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 target price after increasing FY20-21F earnings by 5%.

7.4% Dividend Yield With Improving Fundamentals

• With a net cash balance sheet and a strong operating FCF, we believe Avi-Tech Electronics’ 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%. See Avi-Tech Electronics' dividend history.

Long-term Growth Prospects Still Intact

• We believe Avi-Tech Electronics’ long-term growth prospects are still intact, in line with the digitalisation and macro-economic 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.

Sector Correction Seems to Have Bottomed

• 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 Electronics’ earnings to improve in the subsequent quarters, especially in 1Q20F.
• Avi-Tech Electronics 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 on the stock, as we think investors can be rewarded by attractive dividends while awaiting a turnaround. Valuations have also come down significantly, and the downside is likely limited from here onwards.
• The key downside risk is a slowdown in the economy. The opposite uld present an upside risk.

Source: RHB Invest Research - 10 Sep 2019