RHB’s Jarick Seet has downgraded Avi-Tech from “buy” to "neutral" with a lowered target price of 42 cents from his previous target price of 52 cents.
Seet highlighted that as supply chain disruptions have caused a global shortage of auto chips, he expects this to impact Avi-Tech Electronics’ high-margin burn-in segment over the short term.
In a Feb 15 note, he notes that Avi-Tech’s 1HFY2021 performance was impacted by the shortage of chips for the automotive sector.
This was due to supply chain disruptions, as well as increased margins for chip makers when they supply to other industries. For 1HFY2021, revenue and Profit after tax and minority interests (PATMI) declined by 19.1% and 62.8% y-o-y, respectively.
As such, Avi-Tech’s burn-in segment has been impacted negatively. “We expect this issue to persist for the next few months, and any upside would likely emerge only in 4QFY2021.”
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As a result, he slashes his forecast of FY2021 earnings by 40% to reflect an expected 20% drop in burn-in revenue and lower margins for this segment.
On the other hand, Avi-Tech has a strong enough balance sheet to withstand this temporary setback, and should still be able to pay attractive dividends to shareholders.
Despite the drop in profits, the company still declared an interim distribution per share (DPS) of 0.5 cents, and we expect a one cent per share payout at the end of the financial year, as management has always rewarded shareholders with attractive dividends.
Seet noted that Avi-Tech has a net cash buffer to do so, despite the decline in profitability, and as such, forecasts 4% yield for FY2021.
SEE: CGS-CIMB maintains ‘add’ rating on Avi-Tech, but cuts EPS due to cautious outlook
In the meantime, he reveals that management is actively exploring M&A opportunities, and hopes to close a deal in the near future. Any potential earnings-accretive M&A should be positive.
With a net cash balance sheet and good dividends, he thinks that the company should successfully withstand this short-term setback, and earnings may rebound in 4QFY2021 or FY2022.
As at 1.58pm, shares of Avi-Tech were trading at 44 cents, with a price to book ratio of 1.4 and FY2021 yield of 3.6.
