Following the release of Aztech Global 8AZ ’s 3QFY2024 ended Sept results, CGS International (CGSI) analyst William Tng has downgraded his call on the company to “reduce” from “add” at a lowered target price of 78 cents from $1.21 previously.
Aztech’s 9MFY2024 net profit of $60.4 million was below expectations, forming 67% of Tng’s and 62% of Bloomberg’s full-year forecasts.
He writes: “The miss was due to a 19.7% y-o-y decline in 9MFY2024 revenue to $539.9 million and higher depreciation expenses and foreign exchange (forex) loss. Balance sheet remained healthy with net cash as at end-Sept at $269.8 million.”
The company’s order book for completion in 4QFY2024 is $142 million, to which Tng notes is at its lowest level since 4QFY2020.
“Management is cautious on FY2025 outlook, which, in our view, could be due to slower demand/market share saturation in the US market for the internet of things (IoT) security camera product of its key customer, which accounted for 80% of the 9MFY2024 revenue,” writes Tng.
Aztech remains committed to pursuing new customers to better diversify its revenue base.
The analyst: “Given the $269.8 million net cash balance, we think Aztech would be open to merger and acquisitions (M&As) for customer acquisition.”
Taking into account the 4QFY2024 order book guidance, Tng has cut his FY2024 revenue by 9.6%, leading to a 22.2% drop in his FY2024 earnings per share (EPS) estimate.
“We also lower our FY2025 to FY2026 EPS forecasts by 34.1% to 35.7% as management is cautious on the demand outlook from its key customer in FY2025, while the pace of customer diversification could be slow.”
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Given that Tng expects Aztech’s net profit growth to slow to an average of 3.8% over FY2025 to FY2026, he values the company at an 8.5 times FY2025 price-to-equity ratio (P/E), its four-year average.
He adds: “We also think that Aztech could maintain its 8.0 cent dividend per share (DPS) over FY2025to FY2026, which could help limit share price downside given the prospective 7.77% dividend yield.”
Key upside risks noted by the analyst include potential new customer wins and more project wins from its main customer, and a potential one-time gain should Aztech dispose of a currently vacated plant.
Conversely, de-rating catalysts include order cancellations due to economic slowdown affecting demand and volatile forex rate movements affecting Aztech’s financials.
As at 3.00 pm, shares in Aztech are trading 24.5 cents lower or 23.8% down at 78.5 cents.
