RHB Group Research’s Jarick Seet has maintained his “neutral” call on Avi-Tech Electronics after it saw a 41.7% drop in profit after tax & minority interests (PATMI) in its FY2020 ending June 30.
In a Aug 25 report, Seet gave an unchanged target price of 42 cents, saying that the drop was due to the drop in its high-margin burn-in revenue.
This, in turn, stemmed from the chip shortage in the automotive sector. Seet writes, “we expect the chip shortage to last until 2QFY2022, and prefer to adopt a wait-and-see approach for now. The end of this shortage should be crucial for the recovery of its burn-in business.”
He adds that any upside will likely happen only in 2HFY2022, and as such “the outlook for the company’s burn-in business should remain muted.”
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On the other hand, he says “a silver lining” can be found in Avi-Tech’s manufacturing and engineering segments, which grew by 27% and 13% YoY in FY2021. Seet believes this strong momentum will likely continue into FY2022.
Despite the temporary downturn, he thinks that the company’s balance sheet is sturdy enough to withstand this and enable the company to still pay “attractive dividends” to shareholders.
Avi-Tech declared an interim dividend of 0.5 cents a share, bringing its payout for FY2021 to 1 cent per share. “Management has always rewarded shareholders with attractive dividends, and Avi-Tech has a net cash buffer to do so, despite a drop in profitability, Seet highlights, “Going forward, we expect its FY2022 yield to be about 5% yield.”
Other than its attractive yield, Seet notes that Avi-Tech is actively exploring M&A opportunities and hopes to close a deal in the near future.
“Any potential earnings-accretive M&As should be a positive for its growth outlook. With a net cash balance sheet and good dividends, we think that the company should navigate short-term headwinds easily.”
He thinks its net profit may even rebound in 2HFY2022, when the chip shortage lessens or is cleared.
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As at 10.52am, shares of Avi-Tech were trading at 40 cents, with a FY2022 forecasted price to book ratio of 1.3 and dividend yield of 5%.
