SINGAPORE (Sept 12): RHB is downgrading its call on Avi-Tech Electronics to “neutral” from “buy” previously with a lowered target price of 38 cents.
This is due to a slowdown in the semiconductor sector, as seen in results released by the group and its peers. This in turn has impacted the group’s engineering sector.
In FY18, the group’s earnings were 30.8% lower at $04.86 million, compared to $7.03 million in FY17.
Revenue for the full year ended June 30 was 10.7% lower at $35.7 million from $40.0 million a year ago.
Avi-Tech mainly provides burn-in services for chipmakers in the automotive sector, where there has been gradual and steady growth. And a majority of the group’s burn-in customers are from the automotive sector.
In a Wednesday report, analyst Jarick Seet says, “We expect the burn-in business to continue to grow by 10-15% per annum, and not be impacted by the slowdown in the semiconductor sector.”
On the other hand, the group’s engineering segment took a hit in 2H18, due to delays in customer projects as well as a slowdown in orders from clients, leading to the unit booking loss and dragging down overall profitability.
The management believes that this segment has already hit a low and business is likely to pick up from here on now, with new customers being secured concurrently.
However, the analyst reckons that this would take about six to nine months to ramp up. Hence, the group’s engineering business will likely to be a drag on FY19 profitability – albeit to a smaller extent.
Good news is that management has shown in the past that it is willing to reward its shareholders with attractive dividend yields.
“We think it will likely keep the dividend payout ratio at 90% and above as they did in FY18, as Avi-Tech has a net cash balance and strong operating FCF. With the anticipated recovery in earnings, we like that the stock has an attractive 7.7% yield for FY19F,” says Seet.
The management also said that is actively exploring M&A opportunities. Seet notes that any potential earnings-accretive M&As, given its war chest of $32 million, would be a positive for shareholders.
As at 11.05am, shares in Avi-Tech are trading at 36 cents or 1.2 times FY19 book with a dividend yield of 7.7%.
