SINGAPORE (July 7): RHB Group Research is keeping its “buy” recommendation on Avi-Tech Electronics with an unchanged target price of 50 cents. The stock is also one of the research house’s top “buy” picks within the semiconductor sector.

See: RHB is bullish on the semiconductor industry

In a Tuesday report, lead analyst Jarick Seet says, “The semiconductor sector’s slowdown has likely bottomed out, and the company’s quarterly performance should improve ahead.”

Avi-Tech earlier this year reported a strong 2Q20, with PATMI increasing by 46.7% y-o-y to $1.4 million. Seet expects growth to continue for the company with a strong 2H20, while overall estimate for FY20 will be a much better year, as earnings likely bottomed out in FY19.

“With the sector slowdown in effect since 2018, we believe the correction has bottomed and from here on the outlook should improve, especially with China and the US having struck a Phase 1 trade deal,” adds Seet.

Avi-Tech’s 2H20 should continue to see a pick up in performance with strong growth from burn-in services, which have much higher gross margins. This, coupled with previously implemented cost-cutting measures, should help improve margins as well. For 2Q20, the company’s gross margins increased significantly to 39.7% from 27.9% in 1Q19.

On the other hand, Avi-Tech is staying alive in this critical industry with a strong net cash position. This along with its strong operating FCF, the management should be able to continue rewarding shareholders with attractive dividends despite a drop in profits in the previous year.

Avi-Tech operates in the burn-in and testing segment of the semiconductor industry and focuses mainly on the automotive sector. The company plays a crucial part in the supply chain, which would see its demand for its services still growing despite a world-wide pandemic still ongoing.

For FY19, a total of 2.3 cents in DPS were declared, translating into a PATMI payout ratio of 84.7%. Due to its strong performance, a higher interim DPS of 1 cent was paid in 2Q20, compared to 0.8 cents a year ago.

“We expect management to reward shareholders with at least the same amount going forward, despite a special dividend given in FY19,” says Seet.

Attractive yield aside, the company’s management is actively exploring M&A opportunities and hopes to close a deal in the near future. And the analyst believes that any potential earnings-accretive M&A should be a positive.

“With a net cash balance sheet and good dividends, we are positive on the stock. Investors have been well rewarded with dividends even when earnings were at the bottom of the cycle,” Seet adds.

As at 11.50am, shares in Avi-Tech are trading at 44 cents or 1.5 times FY20 book with a dividend yield of 5.6%.