CGS-CIMB analyst William Tng has maintained his “add” call on Aztech Global, as he deems the group to be “on track for growth” in FY2022. That said, he has lowered his target price on the stock to $1.59 from $1.74.
He explains that although forecasts are unchanged, valuations of tech-related manufacturing stocks have de-rated due to concerns of rising interest rates, resulting in the lower target price.
In a Jan 19 report, Tng thinks that the company’s net profit could have increased in 4QFY2021, as it did not experience any adverse impact from Covid-19, labour shortages and flooding incidents in its factories in China and Malaysia,
As such, he believes that production has “gathered pace” and Aztech could report a net profit of $25.9 million. This will translate into a q-o-q growth of 43.6%, and a y-o-y growth of 2.6%.
However, he adds, “This should be read in the context of a strong 2HFY2020 as Aztech’s China factories were shut for a longer period over the Lunar New Year in 2020 due to the Covid-19 pandemic.”
Moving forward, Tng notes that FY2022 order books are strong, pointing out that as of Oct 14, 2021, Aztech revealed that it had an order book of $426 million, which the company targets to complete in FY2022.
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Given the component tightness, Tng thinks its customers are now placing orders earlier in the year to reduce potential hiccups in their product supply.
Hence, Tng says that there could be a stronger order book update when Aztech releases its FY2021 results. In comparison, its order book as of 2 Jan 2021 was $270.7 million.
Margin-wise, Tng sees Aztech being able to defend its profit margin as the company has design capabilities, and thus can help customers mitigate the component shortage issue with product and/or component redesign.
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“In our view, there is also room for further automation to combat rising wage cost in China and Malaysia.”
While orders from its major customer remain robust, standing at more than 50% of 1HFY2021 sales , Tng thinks that Aztech has a need to diversify its customer base.
As such, he thinks that Aztech is widening the product range with this customer, and is of the view that other possible sectors that Aztech could be exploring include healthcare-related products and electric vehicle related electronics such as modules or charging stations.
Some downside risks to Tng’s call are component shortages and Covid-19 related supply chain disruptions.
Tng adds that complete factory shutdowns in China , if Covid infections are discovered, cannot be ruled out, while new customer wins and stronger earnings could re-rate the stock.
As at 12.36pm, shares of Aztech Global were trading at 91 cents, with a FY2021 price to book ratio of 2.31 and dividend yield of 3.34%.
