Analysts from Maybank Securities and DBS Group Research have downgraded their calls on Aztech Global 8AZ after the company’s 3QFY2024 ended Sept 30 results missed expectations.
Maybank Securities analyst Jarick Seet has lowered his call on Aztech Global from “buy” to “hold” at a reduced target price of 78 cents from $1.14 previously. DBS Group Research analyst Ling Lee Keng has similarly downgraded her call on the company from “buy” to “fully valued” at a lowered target price of 63 cents from $1.27 previously.
Aztech’s 3QFY2024 revenue and net profit in the period fell 41% and 55.7% y-o-y to $166.7 million and $13.7 million respectively, which Maybank’s Seet notes was significantly below his and consensus estimates mainly due to a drop in order volume received from its key customer in the US.
The analyst adds that the company also expects 4QFY2024 to likely be slower than 3QFY2024.
“This is a key risk which we have previously highlighted and we expected the outlook to remain muted in the near term. As a result, we cut our FY2024 and FY2025 profit after tax and minority interests (patmi) estimates by 35.8% and 38.9% respectively,” writes Seet.
He notes that the revenue decline in the quarter was mainly due to lower orders from its key customer in the US which makes up around 80% of Aztech’s revenue.
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“We understand that demand has weakened for its customer which has resulted in the lower orders which Aztech has received. Going forward, orders will also likely remain low with the orderbook only at $142 million as of Oct 1.”
Aztech also expects the coming quarter to be slower and FY2025 to remain flattish.
For the 1HFY2024, the company declared an interim dividend of 0.5 cents, which was 66.7% up y-o-y, representing a pay-out ratio of 83% due to its strong cash generation and $279 million of cash.
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Seet writes: “With profits to decline in FY2024 and outlook being muted going forward, we expect dividends to likely decline going forward but still representing an attractive yield of 8.5% for FY2024.”
He adds: “Despite having some new product introductions (NPIs), we think that it would be more prudent to wait for recovery signs from its key customer which will likely be the main driver of Aztech’s profitability going forward.”
Upside swing factors include better than expected order momentum of existing products during the current internet of things (IoT) upcycle, new customer or allocation wins and better-than-expected margins from operating leverage.
Conversely, downside factors include the commoditisation of consumer IoT products that lead to pricing erosion, a worsening in the components shortage situation and finally, inventory correction due to over-exuberance of supply chain in anticipating end-consumer demand.
Meanwhile, DBS’s Ling notes that Aztech’s 9MFY2024 revenue accounted for 58% of her forecast while net profit only made up 52%, not meeting her nor consensus expectations.
As a result, Ling has has reduced her revenue projections for Aztech’s FY2024 and FY2025 by 31% and 38% respectively, noting that with lower revenues, net margins would also be affected due to lower operating leverage.
She writes: “Hence, we have reduced net margin assumption to 7.8% and 8.2% for FY2025 and FY2026 respectively, and 10.7% for FY2024 as 1HFY2024 was still decent. Accordingly, we slashed our net profit forecasts by 41% and 61% for FY2024 and FY2025.”
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On the company’s order book, Ling understands that the majority of the orders are scheduled for completion in FY2024 and hence, she expects a slower 4QFY2024.
Key risks noted by her include customer concentration risk as around 80% of Aztech’s revenue is derived from its key customer. The company is also susceptible to shifts in consumer preference as consumer electronics products face intense competition.
As at 12.01 pm, shares in Aztech are trading 2.5 cents lower or 3.33% down at 72.5 cents.
