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Broker's take: RHB downgrades Avi-Tech to 'neutral' on weaker target by major customer

RHB Research on Tuesday downgraded semiconductor and electronics firm Avi-Tech Electronics to "neutral" from "buy", lowering its target price in tandem to S$0.43 from S$0.59 previously, as it cited a lower revenue target by Taiwan Semiconductor Manufacturing Company (TSMC), which Avi-Tech supplies wafer machines to.

TSMC last month trimmed its full-year revenue target due to softer demand for smartphones and uncertainty over crypto-mining. RHB said: "This will likely have a negative impact on Avi-Tech’s customers as orders for machines and parts would be delayed, which would in turn affect Avi-Tech. We cut our FY2018 estimates by 36 per cent to factor in the slowdown in the semiconductor sector globally, and expected delays in orders."

The stock now has a forecast FY2018 dividend yield of 5.4 per cent.

RHB further noted that Avi-Tech's business has high operating cost bases due to labour requirements for customisation in  accordance to customers’ needs.

That said, the company's burn-in services are still growing. Avi-Tech provides mainly burn-in services for chipmakers in the automotive sector, and there has been gradual and steady growth there.

"We expect the burn-in segment to continue to grow at 10-15 per cent per annum, and not be impacted by the slowdown in the semiconductor sector," it said.

"Management has shown that they are willing to reward shareholders with attractive dividends in the past. We think that management will likely increase the dividend payout ratio to 85 per cent and above, as Avi-Tech has a net cash balance and strong operating free cash flows."

It added that management is also actively exploring merger and acquisition opportunities, and any such deals that are accretive to earnings would be a positive for shareholders. 

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