Analysts from UOB Kay Hian and Maybank Kim Eng have initiated coverage on Aztech Global, both with “buy” ratings and the same target price of $1.86.
Maybank’s Lai Gene Lih forecasts a compounded annual growth rate (CAGR) of 23% for the company’s earnings per share from FY2020-2023. This will be driven by Customer A’s existing and new products, as well as from contributions from new customers in the IoT and Datacomm segment.
Lai cites a study by Frost & Sullivan (F&S), which expects the consumer IoT industry to enjoy a CAGR of 23.4% during 2019-2023.
“We see Aztech as a proxy of this through the smart security cameras and other new products for Customer A (a US-listed e-commerce retailer), wallet share gains from Customer C (a German smart-home technologies company) and new IoT & datacomm customers and products,” Lai elaborates.
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He believes Aztech’s industry net margins (11.5% in FY2020) are a result of strong execution for customers, R&D capabilities and consumer IoT being early in its technology lifecycle.
Lai adds that R&D helps Aztech engage customers early in product conceptualisation, and also enables rapid commercialisation of emerging trends.
To cope with rising volumes, as well as customers’ requests to have production based outside China, Aztech intends to double its manufacturing capacity through a new plant outside of China, with the initial stage estimated in 1QFY2022. “This diversifies geographic risks from diseases, trade tensions, and disasters.” Lai says.
He concludes by saying that for FY2022, Aztech is trading at 10 times price-to-earnings (P/E), and the $1.86 target price infers 12.9 times.
This is attractive relative to Valuetronics/ Venture Corp, which are trading at 12.2x/15.5x, for 3-year EPS CAGR of -9%/+10% respectively.
He warns, however, of key risks, including customer concentration, competition and commoditisation in the mid-to-long term, risks to its Dongguan facility.
Separately, UOB Kay Hian’s John Cheong and Clement Ho broadly agree with the above points, but are even more optimistic about Aztech, saying it is “well-positioned to ride on the high growth in IoT products via its Customer A, a renowned US e-commerce retailer. We forecast 3-year earnings CAGR of 33.8% for 2020-23, on more order wins from Customer A and order growth from IoT products.”
They also highlight Aztech’s “solid track record of over 30 years”, saying it has a proven ability to capture prevailing consumer electronics trends.
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“Before venturing into the manufacturing of high-growth IoT products in 2018, Aztech had already proven its ability to adapt to new market trends, including the production of sound cards in 1991, ADSL modems in 1996, fibre gateways in 2006, and LED lighting products in 2010,” write Cheong and Ho.
They say Aztech has transformed from being an original equipment manufacturer (OEM) that only makes products based on customers’ specifications, into a full-fledged original design manufacturer (ODM) that develops in-house products to be sold under customers’ brands.
It is also a joint design manufacturer (JDM) offering solutions that are used in collaboration with customers in the design and R&D of new products.
Furthermore, the analysts note Aztech has diversified manufacturing facilities with strong in-house R&D core and robust growth plans.
Aztech has two manufacturing facilities in Dongguan, China, and Johor, Malaysia, and its new manufacturing plant in Malaysia enables it to serve customers that are looking to transfer their operations out of China.
In addition, they say Aztech has a strong in-house R&D core comprising four R&D centres and a 131-strong team that are able to develop new products and provide technical advice to improve manufacturability.
As at 3.55pm, shares of Aztech were trading at $1.51, with UOB forecasting a FY2021 price to book ratio of 3.6 and dividend yield of 2.9%.
