RHB Research has maintained its buy call on Avi-Tech Electronics with a target price of 50 cents, on the expectation that its upcoming FY20 results should be positive. 

Analysts Jarick Seet and Lee Cai Ling said the semiconductor sector’s slowdown has likely bottomed out, and Avi-Tech Electronics’ quarterly performance is expected to improve ahead, with a robust 2H20 net profit. 

On that note, the company’s performance in 2H20 is expected to see a pick up, with strong growth from burn-in services, which has a much higher gross profit margin (GPM). This, coupled with previously-done cost cuts, should help improve margins as well. 

Furthermore, the analysts note that Avi-Tech’s GPM has improved significantly to 39.7% in 2Q20 from 27.9% 1Q19, and expect it to continue booking robust numbers moving into 2H20.

Avi-Tech also has in hand a net cash balance sheet and strong operating free cash flow (FCF). With that, management is likely to continue rewarding shareholders with attractive dividends,  despite the drop in profits in the previous year.

This is possible as the company is in a crucial part of the supply chain, being in the burn-in and testing segment of the semiconductor industry that supplies mainly to the automotive sector. This means demand for its services is still growing, despite the Covid-19 pandemic. 

For FY19, management declared dividends of 2.3 cents, translating to a PATMI payout ratio of 84.7%. A higher interim dividend of 1 cent was paid in 2Q20 compared to just 0.8 cent a year ago, due to its strong performance. 

“We expect management to reward shareholders with the same level of dividends or more going forward – on top of the special dividend given in FY19,” says Seet and Lee. 

In addition, management has said that it is actively exploring merger and acquisition (M&A) opportunities and hopes to close a deal in the near future. They say any potential earnings-accretive M&A should be a positive.

Overall, due to a net cash balance sheet and good dividends, Seet and Lee are positive on the stock. This is because investors have been well rewarded – considering its dividend trends – even when earnings were at the bottom of the cycle. 

As at 2.05 pm on Friday, shares of Avi-Tech were trading 1.1% lower at 45 cents, giving it a FY20 price-to-earnings ratio of 13.7 times with a dividend yield of 5.5%.