AZTECH GLOBAL LTD. (SGX:8AZ)
Aztech Global - Proxy To High-Growth IoT Products; Initiate Coverage With BUY
- Aztech Global (SGX:8AZ) is an electronics manufacturer with 34 years of proven track record in adapting to evolving trends and transforming from an OEM into a full-fledged manufacturer. Aztech Global is well-positioned to ride on the high growth in IoT products via 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.
- Initiate coverage on Aztech Global with BUY and target price of S$1.86.
INITIATE COVERAGE ON AZTECH GLOBAL (SGX:8AZ)
Riding on Customer A’s fast-growing IoT products.
- Customer A, a renowned US e-commerce retailer, is Aztech Global (Aztech)’s largest customer, and contributed 49.0% of Aztech’s revenue in 2019 (undisclosed in 2020, up from 28.4% in 2018).
- Aztech had been making smart security cameras for a product company since 2015, before the company was acquired by Customer A in 2017. Customer A’s revenue growth has been impressive for the last two years, at more than 100% in each of 2018 and 2019 due to Customer A’s push for greater adoption.
- We forecast a 3-year earnings CAGR of 33.8% for Aztech for 2020-23, as Customer A wins more market share and appoints Aztech to produce its other divisions’ products, and Aztech secures more growth from IoT products.
Solid track record of > 30 years with proven ability to capture prevailing consumer electronics trends.
- Aztech was founded in 1986 to design and manufacture personal computers. 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.
- 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, and joint design manufacturer (JDM) offering solutions that are used in collaboration with customers in the design and R&D of new products.
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. Aztech’s new manufacturing plant in Malaysia enables it to serve customers that are looking to transfer their operations out of China.
- In addition, 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.
STOCK IMPACT
3-year projected revenue CAGR of 33.0% for 2020-23.
- Our revenue assumptions for the IoT devices and datacom products segment of 42%, 38% and 30% for 2021, 2022 and 2023 respectively are based on the successful take-up of IoT products sold by Customer A to end-consumers. This is supported by increased adoption due to market share gains by Customer A, as well as the increasing acceptance of new innovative IoT products. Aztech has a pipeline of two new IoT products with Customer A alone to be launched in 2021.
Growing orderbook reflection of strong demand.
- As at 20 Apr 21, Aztech had an orderbook of S$489m (2 Jan 21: S$270.7m), with the bulk (94%) comprising IoT devices and datacom products and 6% from the LED products segment.
- Historically, the orderbook is completed within a six-month period from the award of orders. Aztech also has a typical 40:60 seasonality for 1H:2H sales driven by festivities and online sales events such as 9.9, 10.10, 11.11, Black Friday and Cyber Monday.
IPO proceeds to increase manufacturing capacity and business expansion.
- Of the S$189m new funds raised in Aztech's IPO, an estimated S$50m has been earmarked for the expansion and enhancement of new and existing manufacturing facilities. Additionally, a further S$50m will be for business expansion via investments, M&As, JVs and/or strategic collaborations.
AZTECH - VALUATION & RECOMMENDATION
- Initiate coverage on Aztech with BUY and target price of S$1.86, pegged to 18.4x 2021 earnings forecast, based on the average of Singapore-and Malaysia-listed technology manufacturing peers. We believe orders are just starting to ramp up in 2021 and would sustain into 2022.
- Assuming a 35-40% payout ratio, Aztech's 2021-22 dividend of S$0.04 and S$0.055 would translate into yield of 3.0% and 4.1% respectively.
- See
- See the 23-page coverage initiation report attached below for complete analysis on Aztech Global (SGX:8AZ).
John Cheong
UOB Kay Hian Research
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Clement Ho
UOB Kay Hian
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https://research.uobkayhian.com/
2021-04-22
SGX Stock
Analyst Report
1.86
SAME
1.86
