Analysts are mixed on Aztech Global after the release of its results for the FY2022 ended Dec 31, 2022 on Feb 17.
The Mainboard-listed group reported earnings of $14.3 million for the 2HFY2022, 69.7% lowre y-o-y, while FY2022 earnings came in 32.7% y-o-y lower at $52.5 million.
On the back of Aztech’s results, Maybank Securities analyst Jarick Seet upgraded his recommendation for Aztech Global from “hold” to “buy” with an increased target price (TP) of $1.02 from 79 cents previously. The new TP is based on a higher 7x FY2023 price-to-earnings ratio (P/E) from 6x.
In his report dated Feb 20, Seet says Aztech’s outlook looks positive despite the “speed bump”. The analyst adds that Aztech’s FY2022 performance was a “dismal” one mainly due to a foreign exchange (forex) contract loss of $56.6 million which caused net profit after tax (NPAT) to drop 9.7% y-o-y to $67.2 million, far below Maybank’s and consensus estimates.
The analyst notes that all of Aztech’s forex losses have been accounted for in FY2022. “As over 30% of its costs are in renminbi (RMB), Aztech entered an forex contract to hedge against the USD weakening against the RMB. With the strengthening of the US dollar (USD), it incurred a fair value loss on derivative financial instruments of $56.6 million,” he explains.
“Going forward, management will rely on natural hedging and we should not see such forex derivative losses,” adds Seet.
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Aside from the one-time forex contract loss, he believes that Aztech’s core business remains strong with its main customer, which forms just under 80% of its order book, expected to place 15% to 20% more orders in FY2023 as it continues to benefit from the diversification trend away from China.
According to him, Aztech’s order book stood at $718.6 million at Feb 17, 2023 with a shorter lead time. “We believe that Aztech is benefiting from the on-going trend of diversification away from China. Its utilisation rates at its Dongguan factory in China and Malaysia is close to 100%, signalling positive quarters ahead,” Seet says.
Aztech expects its new 300,000 sq ft facility in Johor to be ready to commence operations in the second quarter of this year.
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Seet sees Aztech’s forex “hiccup” as representing an investment opportunity. “Without the forex loss, core NPAT would have been $123 million, a record year for Aztech. We believe that management will likely engender a strong earnings rebound in FY2023 and valuations look to be bottoming at 3.7x excluding cash FY2023 P/E,” he says.
“As a result, we think the worst is over and raise our FY2023 and FY2024 NPAT by 10.4% and 12.4% due to stronger orders despite the current macro environment,” adds the analyst.
Meanwhile, analysts from CGS-CIMB Research and DBS Group Research have maintained their “add” and “buy” calls with target prices (TPs) of 91 cents and $1.15 respectively, from 96 cents and $1.02 previously.
William Tng of CGS-CIMB notes that Aztech issued a final dividend of 1.5 cents for 2HFY2022, bringing its total dividend payout for FY2022 to 4.5 cents, a payout of 51.7% in line with FY2021’s 51.9% payout ratio.
He has reiterated his “add” call for Aztech’s net cash balance sheet of $210.9 million as at end-FY2022 to weather the downturn, its projected dividend yield of 7% to 9% over FY2023 to FY2025F, as well as the company’s earnings per share (EPS) growth prospects.
Tng values Aztech at a lower 7.5x from 7.7x previously, which has caused his previous TP of 96 cents to lower to 91 cents. “Reflecting concerns over end customer demand given the uncertain economic outlook, we revise down our FY2023 FY2024 revenue forecasts by 12.6% to 16.5%, leading to 10.3% to 14.2% downwards revisions to our FY2023 and FY2024 EPS estimates,” he says.
For DBS analyst Ling Lee Keng, Aztech’s net margins of 15.1% — excluding forex losses — for FY2022 and 11.9% for FY2021 are attractive compared to its peers in the downstream technology manufacturing space.
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She attributes this achievement mainly to Aztech’s core strengths in the research and development (R&D), design, engineering and manufacturing of IoT-related products.
Ling has pencilled in a higher net margin assumption of 13% for FY2023 and 13.6% for FY2024, from 11.4% to 11.5% previously, raising her earnings estimates for FY2023 and FY2024 were by some 30% each.
Her higher TP of $1.15, from $1.02 previously, is pegged to a 7x P/E, 0.5 standard deviation below its average P/E since listing, on FY2023 earnings. She believes Aztech’s current valuation of 5x FY2023 P/E is “very attractive”, below the average P/E of around 9x.
Key catalysts to Ling’s valuation include a higher value orderbook, faster-than-expected ramp up of Aztech’s new plant in Johor and further improvements in cost management, leading to
higher margins. Meanwhile, her key downside risks include customer concentration risks and weak demand for consumer electronics products on the back of the macro headwinds.
As at 3.35pm, shares in Aztech Global are trading at 0.5 cents or 0.59% down at 84 cents.
