UOB Kay Hian analysts John Cheong and Clement Ho have maintained their “buy” call on Aztech Global, but with a lowered target price of $1.55 from $1.70 previously.
The lower target price is pegged to an unchanged FY2022 earnings of 13.3 times, which is still pegged to Aztech’s Singapore peers’ average, write the analysts in a Jan 10 report.
“We continue to like Aztech as the proxy to high-growth IoT products, where we believe orders are just starting to ramp up in 2021 and would sustain into 2022,” they add.
Cheong and Ho have also kept their estimates unchanged for the FY2021, although they have trimmed their earnings forecast for the FY2022 and FY2023 by 9% and 8% respectively after reducing their revenue forecast for both years by 5% each.
“[The reduction was made] to reflect a more conservative estimate and account for production disruption due to components shortages,” say the analysts.
In their report, Cheong and Ho think that Aztech’s share price correction of over 30% since its IPO in March 2021 is “overdone.”
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“[Aztech] has been delivering solid results (9MFY2021 earnings grew 55% y-o-y) and we expect 2021 and 2022 earnings to grow 33% and 22% y-o-y respectively. We understand that Aztech’s operations remain intact and orderbook remains healthy,” they write. Aztech’s financial year ends in December.
As for the correction, their belief is that it took place due to three factors, namely, concerns over components shortages and year-end portfolio rebalancing by institutional investors in paring down underperforming holdings, as well as a fear of labour issues.
This is as one of Aztech’s industry peers, ATA IMS (AIB MK) suffered a massive share price correction after its largest customer stopped ordering from AIB MK due to labour infringement issues.
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They note that Aztech’s operations remain intact, with its facilities currently enjoying high utilisation rates and managing the components shortages well.
This is due to the company leveraging the strong brand name of customers, maintaining its good long-term relationship with suppliers, and modifying product designs to switch reliance to parts that are more readily available.
Cheong and Ho point out that Aztech also saw a “sequential improvement in net margin”, from 11.4% in 1QFY2021, 12.1% in 2QFY2021 and 12.8% in 3QFY2021. “This also proves Aztech’s ability to manage the components shortages well,” they say.
Orderbook strength for the company also improved with orders at $636 million as of Oct 14, 2021, compared to $569 million at Oct 1, 2021. Some $426 million of this are scheduled for delivery in 2022 and $210 million for 4QFY2021.
Moving forward, the analysts are optimistic about Aztech's 4QFY2021 performance and take the recent share buyback as a vote of confidence.
Aztech has bought back 1.87 million shares, or 0.24% of its total shares since the approval of its share buyback mandate on Oct 13, 2021. In addition, executive chairman and major shareholder, Michael Mun has also acquired approximately 500,000 shares in Aug and Sep 2021.
“Based on its latest business update, Aztech is optimistic on the outlook taking into consideration of the healthy demand for IoT products, improving vaccination rate, strong orderbook and steps that were put in place to minimise production disruption due to power usage regulations.”
In Dongguan, China, Aztech has put in place measures to comply with the regulations on power usage by the local authorities to minimise disruption to the production schedule. This includes increasing the production during night shifts and getting the support of the local government.
As at 3.25pm, shares of Aztech Global traded at 89 cents, with a FY2021 price to book ratio of 2.3 and a dividend yield of 4.5%.
