SINGAPORE (May 8): RHB Securities is downgrading Avi-Tech Electronics to “neutral” from “buy” after Taiwan Semiconductor Manufacturing Co trimmed its full-year revenue target due to softer demand for smartphones and uncertainty over crypto mining.
As Avi-Tech’s engineering and manufacturing customers supply wafer machines to TSMC, this would likely have a negative impact on Avi-Tech’s customers as orders for machines and parts would be delayed, which would in turn affect Avi-Tech, explains RHB.
In addition, RHB also notices a slowdown in many of its semiconductor peers globally. As a result, it has cut our FY18F estimates by 36% as it expects a significant slowdown in both segments, which happen to have high operating cost bases due to labour requirements for customisation in accordance to customers’ needs.
“We cut out FY18F estimates by 36% to factor in the slowdown in the semiconductor sector globally, and expected delays in orders as highlighted above. The stock has an attractive FY18F dividend yield of 5.4%,” says analyst Jarick Seet in a Tuesday report, with lower DCF-derived target price of 43 US cents from 59 US cents.
However, RHB expects demand for Avi-Tech’s burn-in services to grow as it mainly provides burn-in services for chipmakers in the automotive sector, where there has been gradual and steady growth. Seet expects the burn-in segment to continue to grow at 10-15% pa.
Meanwhile, management has shown their willingness to reward shareholders with attractive dividends. Seet thinks management will likely increase the dividend payout ratio to 85% and above, as Avi-Tech has a net cash balance and strong operating free cash flows. For FY18, RHB is forecasting a yield of 5.4%.
Any potential earnings accretive M&As -- given its war chest of $32 million -- would be a positive for shareholders, adds RHB.
As at 11.59am, shares in Avi-Tech are down 1 cent at 44 cents or 14.7 times FY18F recurring earnings.
