• Upgrade to BUY from Neutral, DCF-based Target Price to SGD0.41 from SGD0.31, 17% upside, 6.6% FY20F (Jun) yield.
• We think that the slowdown in the semiconductor sector has likely bottomed out for Avi-Tech (SGX:BKY) and results look likely to improve in the subsequent quarters. As such, we expect FY20 to be a much better year after earnings likely bottomed in FY19.
• We upgrade to BUY with new DCF Target Price after increasing FY20F and FY21F earnings by 7% and 6%.

6.6% Yield With Improving Fundamentals

• With a net cash balance sheet and a strong operating FCF, we think management will continue to reward shareholders with attractive dividends despite the drop in profits.
• For FY19, a total of 2.3 cents has been declared, representing a PATMI payout ratio of 84.7%. We expect the same or more going forward, which would present FY20F yield of 6.6%.

Long-term Growth Prospects Still Intact

• We believe Avi-Tech’s long-term growth prospects are still intact, in line with the digitalisation and macroeconomic trends and increased electronics use in the automotive sector, coupled with Smart City initiatives 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 also partially due to the fact that the majority of its burn-in customers are from the automotive sector.

Strong 1QFY20 Ahead

• With a slowdown in the sector happening since 2018, we expect the sector correction to have hit a bottom, with an improving outlook ahead, especially if there is a positive outcome from the talks between China and the US in October.
• We expect Avi-Tech’s earnings to improve in the subsequent quarters, especially 1QFY20F, as it has seen some pick-up from the manufacturing and engineering segments, coupled with cost-cutting measures previously done, which will likely help to improve margins as well.

Upgrade to BUY, Accompanied by 6.6% Yield

• The stock is backed by an attractive FY20F yield of 6.6%, and management is actively exploring M&A opportunities – of which they hope to be able to close one by 1H20.
• 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 as we think that investors can be rewarded by attractive dividends – as shown by the management’s track record of paying out attractive dividends even during the bottom cycle of earnings.
• The key downside risk is a slowdown in the economy. The opposite situation sent an upside risk.

Source: RHB Invest Research - 7 Nov 2019