SINGAPORE (Jun 2): Burn-in testing specialist Avi-Tech is going places as it hitches a ride on rising demands for its services on the back of emerging technologies such as autonomous driving.
CGS-CIMB has initiated coverage on the counter with an “add” or “buy” recommendation and at a target price of 42.2 cents. This represents a potential upside of 9.5% from the company’s share price of 38.5 cents as at June 1.
The brokerage’s analysts William Tng and Caleb Pang note that Avi-Tech has benefitted from the structural growth of automotive electronic components.
“Through its burn-in services and burn-in board manufacturing businesses, Avi-Tech offers investors exposure to the secular trend of growing semiconductor content in vehicles,” the duo point out in their Jun 1 initiation note.
The way Tng and Pang see it, Avi-Tech has also been a strong dividend paymaster.
On Feb 13, the company reported a 2.1% dip y-o-y in revenue for 2QFY2020 ended December 2019 to $7.5 million. However, earnings in the same period rose by 46.7% y-o-y to $1.4 million following a vast improvement in its efficiency. Gross margin also increased from 27.9% in 2QFY2019 to 39.7% in 2QFY2020.
The company had declared an interim dividend of 1 cent per share – a payout ratio of 55% - up from 0.8 cents in the year earlier period.
“Avi-Tech has minimal capex needs and hence, strong free cash flow generation. The company has been paying dividends to shareholders for the past five years. Average dividend payout ratio over FY17-19 was a high 81% of net profit,” Tng and Pang observe.
The duo expect the company to continue to reward shareholders, with dividend yields projected to be 6.49% for FY20-22F.
Potential risks they foresee include a decline in customer demand due to the pandemic as well as foreign exchange exposure risks to its net long exposure to the US dollar. They also flag a possibility of the company’s mergers and acquisitions (M&A) turning sour.
Still, the prospect of accretive M&A and better-than-expected customer demand, add credence to Avi-Tech’s good standing, Tng and Pang stress.
As at 2.20pm, shares at Avi-Tech were trading flat at 39 cents.