UOB Kay Hian analysts John Cheong and Clement Ho have maintained their “buy” rating with an unchanged target price of $1.86 for Aztech Global after a conference call with the company’s management team.
In a June 25 report, Cheong and Ho listed three reasons behind their optimism on the counter.
Firstly, Aztech manufacturing plant in Dongguan, which accounts for 80% of the group’s production, has not experienced any disruption in production for the entire 1HFY2021.
Some 70% of the group’s staff in its Dongguan plant have been vaccinated, with a target to fully vaccinate every staff by end July. In addition, Aztech has put in place various prevention measures such as restricting outside visitors and only allowing its own staff to handle cargo.
Second, the group has indicated that Malaysia’s tightened Movement Control Order (MCO) has had “limited impact” on its plant. This comes despite the MCO’s restrictions that only allow 60% of the group’s workers to be on its premises, as the Dongguan facility was able to make up for the shortfall.
Furthermore, Cheong and Ho observes the company is phasing out low-margin products to free up more capacity for better-margin products.
Finally, they highlight that Aztech continues to see robust orders from its key customers with orders lasting until 2022.
In addition, Aztech is working on several new products with its key customer, with production commencing in 3QFY2021.
See also: Aztech Global obtains permit to operate in Malaysia during lockdown
This means Aztech has advantages in its ability to provide more dedicated services and work closely with the design team of its key customer, compared with larger competing manufacturers.
Finally, the analysts also observe that “despite an industry-wide shortage of raw material supplies, especially semiconductor-related parts, Aztech continues to fare well thanks to the strong bargaining power of its key customer and long-standing relationship between Aztech and its suppliers. In addition, Aztech is able to pass on higher material costs to its customers.”
Separately, analysts from CGS-CIMB also give an “add” rating on the counter, with an unchanged target price of $1.91.
While analyst William Tng also agrees broadly with Ho and Cheong’s points about the limited impact to production and tight supply chains, he does highlight that Aztech is expected to see strong sales of smart cameras.
Aztech is the sole manufacturer of its Customer A’s smart security cameras, which are sold mainly in North America. CGS-CIMB’s checks on June 25 found Aztech’s manufactured cameras appearing seven times in the top 10 “Best Sellers in Surveillance & Security Cameras” category on Amazon.com in the US.
As such, they see this as a good proxy to gauge the demand from end-customers and order flow from Customer A. Tng adds, “we continue to expect strong demand for its smart security cameras and new wallet share gains from Customer A to drive earnings growth through FY2021F-2023.”
As at 3:45pm, shares of Aztech were trading at $1.24, with a FY2021 price to book ratio of 3.6 times and dividend yield of 2.9%.
