Big contracts from certain key customers can generate significant revenue and earnings. However, Jeremy Mun, the executive director and COO of Aztech Global 8AZ , recognises the importance of diversifying the customer base.
The veteran electronics manufacturer, whose production expertise includes wireless technology, the Internet of Things (IoT), smart home technology and lighting applications, has been present in Singapore since 1986 when it first began manufacturing plug-in sound cards, modems and home networking devices.
Thirty-eight years later, Aztech has moved up the value chain, boosting its capacity and technological abilities to include three manufacturing facilities and four R&D centres today. Its latest facility in Pasir Gudang, Johor, Malaysia, began operations last year, following extensive location scouting between 2017 and 2018.
“At that time, we were looking for space for expansion. We were looking at China be- cause it was and still is the best place for manufacturing in terms of facilities, the eco-system, and the entire supply chain, so we were speaking to local governments at the time,” says Mun in an interview with The Edge Singapore.
Geopolitical complications arose, however, when then-President Donald Trump slapped tariffs on Chinese imports, forcing Aztech to look for other potential sites due to the com- pany’s revenue largely coming from US clients. It would not be until the middle of 2019 that Johor was decided as the new site’s location.
“Then Covid-19 hit and everything almost came to a standstill until 2021, when the world started to reopen and we started to increase our operations on-site,” adds Mun. Soon after, however, another problem arose, albeit a happy one. The new facility was too small to cope with the volume required by the customers.
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“So, we started looking for a location for expansion, and we came across the Pasir Gu- dang site, which we set up last year and is now in full swing,” says Mun. The 300,000 sq ft facility, which has a dedicated manufacturing space and a warehouse, costs around $27 million, which, according to the company’s estimates, will take two-and-a-half to three years to break even. With the site currently operating at about 60% utilisation, Mun expects this number to increase to around 80% towards the third quarter of this year due to “seasonality in production”.
He adds: “But this is based on the previous historical information we have now. If you had asked me two years ago, I would give you a more complete number, because we had a longer lead time from customers. Due to the supply chain issues right now, we’re only getting probably two to three months of visibility.”
Coming full circle
Beyond expanding its fabrication base to build for other brands, the company also launched its own products last August, under the Kyla brand, which Mun classifies as “vision technology”. This refers to security cameras with smart capabilities and digital microscopes equipped with wider web or app-based compatibilities. “Aztech has always been a product company.
For the past 30 years or so we have been engineering sound cards, developing modems from analogue to digital, as well as LED lighting and IoT products. So by nature, we are a company with the R&D capability to develop products,” says the COO.
While the obvious application for Kyla products revolves around security or surveillance purposes, Mun sees potential for use in the industrial, healthcare and automotive sectors. “We are not limiting ourselves. In fact, our CEO himself actually highlighted the areas out there for us to exploit,” says Mun, referring to his father Michael Mun, who has had plenty of related experience in this field. While the R&D of Kyla products are largely done in-house, drawn from years of expertise, the company also works with tertiary education centres such as universities and polytechnics to explore opportunities to find new solutions, ideas and products.
In addition, Aztech also works with some third-party companies for software or design licensing. Aztech fully undertakes the manufacturing of Kyla products to improve control, from the initial stages of plastic injection and moulding to the final stage of packaging. “We even have our internal lab facility do the product testing,” says Mun proudly.
Even with the Pasir Gudang plant in operation, Kyra products continue to be made in Aztech’s facilities in China. “Some production was shifted out of China at the requests of the US and European customers who want to de-risk their value chains. However, we still want to focus our production in China outside this group of customers,” explains Mun.
New customers and orders
While many manufacturing companies are still grappling with the downturn, Aztech seems to have bounced back smoothly. In FY2023 ended Dec 31, 2023, revenue increased by 9.3% y-o-y to $896.3 million. Thanks to much better profit before tax margins of 13.8% in FY2023 versus 9.8% in FY2022, earnings jumped by 48.8% y-o-y to $100 million.
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The company has declared a final dividend of 5 cents, bringing full-year payout to eight cents versus 4.5 cents paid for FY2022. As at the end of 2023, it has built up an order book of $333.9 million.
New customers include US companies dealing with smart baby monitoring, kitchen scrap management, healthtech wearables and a Singapore company in respiratory monitoring devices.
Following Aztech’s full-year results, CGS International’s William Tng and Maybank Securi- ties’ Jarick Seet have both kept their “add” and “buy” calls, with an unchanged target price of $1.23 and a higher target price of $1.14 from $1.08 respectively.
Tng notes that the company could potentially maintain a dividend of eight cents from FY2024 to FY2026, which would reward investors with a prospective 9.2% dividend yield (based on the recent share price of 87 cents) in a weak environment from a dim macroeconomic outlook.
Meanwhile, Maybank’s Seet is confident that Aztech can continue to declare generous dividend payouts. “We expect dividends to potentially increase further as performance improves in FY2024 as its net cash position has also increased to $249.8 million from $217.8 million,” writes the analyst.
On the company’s outlook, Seet writes: “We understand that its key customer is still seeing strong demand from the US and could potentially lift its orders by 10% to 15%, which would benefit Aztech. Management is also seeing increased orders from existing and new customers.”
Indeed, the significance of Aztech’s key customer in the US, a global leader in online retail and a provider of web services, cannot be understated, admits Mun, who acknowledges it as a “good customer to have”. He continues: “They’ve been our key customer for the last five years or so. They also started humbly and their very unique product really gained traction during the Covid-19 pandemic.”
The product in focus — a smart security camera — benefitted from the pandemic as e-commerce blew up and working Americans travelled across the US to and fro between home states and larger metropolitan cities.
“They have a good consumer product and a good customer base. The good thing about that is every couple of years, it needs to be upgraded — better resolution and better features. Or maybe the camera they bought has broken down. So they continue to grow and so do we. We have to upgrade with them, and,” says Mun.
Although “the bulk” of Aztech’s revenue came from this single customer, the company has not sat idly by as evident from its approach of sourcing new customers and inventing its own products. As the company continues to look inwards and outwards to diversify its risks, Mun notes that a share buyback is highly unlikely at the moment, despite the company’s low P/E ratio and high dividends.
“At every AGM, we have this discussion as part of our resolution and we will put it up again in case we need to defend the stock or if there is a discussion on what its price level or threshold should be. We also don’t want to keep that window open for too long because that will limit the ability of our management and staff to purchase shares from the open market,” he explains.
Year to date, Aztech’s share price has gained 2.66%, closing at 97 cents on April 17. This values the company at about $747 million and 7.45 times historical earnings. As at Dec 31, 2023, NAV stood at 45 cents per share. Mun adds: “There are opportunities out there. It’s about how fast our R&D can develop the products to capture these opportunities and what kind of new technologies and use cases we can find for our customers to benefit from these products.”
