DBS Group Research is maintaining its “buy” call on integrated solutions provider Aztech Global at a lower target price of $1.54.
This is down 13 cents from the previous $1.67 call and is expected to give the counter a 67% upside from its 92-cent price on Feb 15, analyst Ling Lee Keng writes in a research note.
“Our new target price is pegged to a lower FY2022 peer average of 12x (vs 13x previously) due to the de-rating of tech stocks globally on FY2022 earnings,” she explains.
What makes it a counter to buy is its strong earnings momentum and attractive valuations, adds the analyst.
Aztech is trading at – what Ling calls – an attractive price-to-earnings growth of only 0.23x. For comparison, the value stands at 0.8x for its peers.
For FY2021 ended Dec 31 2021, she expects the company to post “a good set of results in line with ours and the consensus”. Ling’s prediction is that net earnings will come in at $72.3 million, in line with the market consensus of $74.3 million.
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Aztech is slated to report its FY2021 results after the market closes on Feb 22.
The company, which provides design and manufacturing services, has products ranging from IoT devices, data communication products and LED lighting products.
“[The company’s] nine-month net earnings already accounted for 66% of our FY2021 projections vs. 55% in FY2020, implying a flat y-o-y for 4Q2021, as 4Q2020 was exceptionally strong,” says Ling.
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As such, she expects the company to maintain an above industry average net margin of more than 10%. This follows the net margin of 12.1% it attained in 9M2021, despite the supply chain disruptions.
Ling – who has penciled in a net margin assumption of 12% for FY2021 – believes that the strong performance in 9M2021 follows productivity gains and effective tax management.
“Despite the supply chain disruption, the situation is still manageable,” she says adding that Aztech has already secured the bulk of the components to fulfil the $210 million in orders for FY2021.
This was done by leveraging on the company’s close collaborative efforts with suppliers, customers and relevant business partners to achieve smooth production and timely delivery of customers’ orders.
Aztech is also set to expand its resourceful base of alternative suppliers or suppliers who are more readily available, notes Ling.
Going forward, the analyst reckons that the ongoing supply chain disruptions and chip shortage could begin to ease in 2022, following a gradual increase in capacity of chip manufacturers.
“Given the strong demand for semiconductor chips driven by new technologies as well as the new requirements for better IT infrastructure to support the increased telecommuting, we believe the chip shortage is likely to be resolved only in 2H2023, when the bulk of the new production capacity is in full operation,” mulls Ling.
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Meanwhile, she foresees a growth in orders on the back on the company’s strong relationship with customers, particularly in the IoT space.
For instance, revenue contribution of a key customer has surged from 28.4% of total revenue in FY2017 to 49% in FY2019 and over 50% at present.
The company is expected to continue working with this customer for products that are beyond smart security cameras.
Other opportunities come from the rise of smart cities globally, industry 4.0 and the increasing adoption of IoT by consumers. These trends follow advancements in wireless networking technologies, data analytics and a reduction in the cost of connected devices.
The way Ling sees it, Aztech has a “natural advantage” in these areas given its involvement in R&D production. This is unlike its competitors who are mainly focused on the manufacturing of products, she adds.
To this end, Ling expects the company’s FY2021/22/23 earnings to grow strongly at 35%/32%/20% respectively, thanks to the buoyant IoT market.
As at 3.07pm on Feb 18, shares in Aztech Global were up a cent or 1.09% at 93 cents.
Cover image: Samuel Issac Chua/The Edge Singapore
