Analysts at DBS Group Research and Maybank Securities have both kept their “buy” calls on electronics manufacturer Aztech Global 8AZ at a raised target price of $1.27 from $1.25 previously and an unchanged target price of $1.14 respectively. Meanwhile, CGS International has similarly kept its “add” call on the company, albeit at a reduced target price of $1.21 from $1.23 previously.
For the 1HFY2024 ended June, Aztech saw an 8.7% y-o-y growth in its net profit to $46.7 million, despite revenue decreasing 4% y-o-y to $373.2 million over the same period.
DBS analyst Ling Lee Keng notes that the company’s orderbook is “riding” on the “fast-expanding” internet of things (IoT) market with over 90% revenue exposure.
Ling writes in her July 31 report: “Orderbook of $304.4 million as at July 30 is healthy, with the bulk to be completed by the end of the year. Order lead time is now much shorter, about three months, with the recovery of the supply chain.”
She adds: “We expect the order momentum to remain decent, translating to revenue growth of 3% in FY2024 and 8% in FY2025.”
For the 1HFY2024, Aztech’s net margin of 12.5% was higher than the 11% recorded in the 1HFY2023, which Ling expects to “remain above the 10% level” moving forward, above the average of the “low single-digit” net margin of its peers in the downstream space.
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The analyst attributes this to Aztech’s core strengths in research and development (R&D), design, engineering, and the manufacturing of IoT-related products, writing: “We have pencilled in higher net margin assumption of 12.6% for both FY2024 and FY2025, vs our previous assumption of 11%.”
She continues: “We expect the group to achieve similar net margins in 2HFY2024 vs 1HFY2024, given that revenue is typically higher in 2HFY2024 and the group should enjoy some operating leverage.”
Key risks noted by Ling include around 85% of Aztech’s revenue being derived from its key customer and the possible shifts in consumer preference due to the competitive nature of consumer electronics products.
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Meanwhile, Maybank’s Jarick Seet notes that the company’s order book is “deceptively weak” due to faster lead times following the Covid-19 period.
Despite this, Seet is confident of Aztech securing “another $150 million to $200 million” by end-FY2024, as well as stronger revenue in 2HFY2024 due to a snowstorm affecting production in 1QFY2024.
“It also has some ramp-up in new products from existing and new customers by the end of FY2024,” adds Seet.
On the company’s 66.7% y-o-y growth in interim dividend to five cents per share, the analyst writes: “With strong cash flow generation and a healthy net cash balance sheet, we expect the total dividend to increase to 10 cents for FY2024, which represents an attractive 9.8% yield.”
Meanwhile, Aztech has started to set-up plastic injection machines at its Pasir Gudang plant in Johor, Malaysia, to expand its offering.
On this, Seet writes: “This is slated for completion in 3QFY2024 with mass production to start from 4QFY2024. With three products from health-tech and consumer segments successfully entering commercial production and five new products slated for commercial production by the year-end, we expect FY2024 to end positively.”
Upside factors noted by him include a better-than-expected order momentum of existing products during current IoT upcycle, new customer wins and better-than-expected margins from operating leverage.
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Conversely, downside factors include the commoditisation of consumer IoT products that could lead to pricing erosion, a worsening of the components shortage situation and lastly, inventory correction due to an over-exuberance of the supply chain in anticipating end-consumer demand.
Finally, CGSI analyst William Tng has lowered his target price as Aztech’s 1HFY2024 revenue did not meet his expectations of forming 50% of his full-year forecast, only meeting 38.7% of his and 37.9% of Bloomberg’s FY2024 forecast.
He adds: “1HFY2024 performance was also aided by a $1.8 million bad debt write-back and a foreign exchange (forex) related gain of $4.3 million.”
Tng also notes that Aztech’s management has highlighted increased competition for the “first time since its initial public offering (IPO)”, increasing its R&D headcount by 11% to enhance its R&D capabilities and targets to further optimise costs with the rollout of a manufacturing execution system in 2QFY2024.
Overall, given the lower-than-expected 1HFY2024 performance, Tng has lowered his FY2024 revenue by 21.9%, leading to a 13.9% decrease in his FY2024 earnings per share (EPS) forecast.
He adds: “Given concerns over increased competition, we also reduce our FY2025 revenue forecast by 1.1% and lower our gross profit margin assumption by 1.2 percentage points (ppts), leading to a 2.0% reduction in our FY2025 EPS forecast.”
Key risks noted by Tng include order cancellations due to an economic slowdown affecting demand, and volatile forex movements affecting Aztech’s financials.
As at 12.17 pm, shares in Aztech are trading two cents higher or 1.96% up at $1.04.
