Aztech Global - CGS-CIMB Research 2021-06-25: Abiding By Its Growth Story

AZTECH GLOBAL LTD. (SGX:8AZ)

Aztech Global - Abiding By Its Growth Story

Strong order book for FY21F and winning more wallet share from Customer A. Aztech is preparing to ramp up production in 2H21F.
We believe Aztech will be able to achieve FY21F net margin of 11.6%, backed by strong demand and its ability to manage supply chain risks.
Reiterate ADD rating on Aztech with unchanged target price of S$1.91, still pegged to 16x FY22F EPS, supported by capacity expansion and a robust order book.

We met Aztech Global (SGX:8AZ)'s management and our key takeaways are
1. Aztech’s order book visibility remains robust for FY21F;
2. it gained more wallet share from key Customer A with production expected to begin in 3Q21F;
3. the company expects a strong 2H21F and is in the midst of preparing for a production ramp-up; and
4. while supply chains are tight, Aztech is managing the situation well due to its good relationships with its suppliers and strong bargaining power with its key customers.
In view of tight supply chains, we believe Aztech will have order book visibility up till 1H22F as its customers are placing orders ahead. We keep our FY21F net margin assumption of 11.6%, as Aztech has the ability to source the required components and pass on rising raw material costs to its customers.

Aztech is the sole manufacturer of Customer A’s smart security cameras which are sold mainly in North America. Our checks on 25 Jun 2021 found Aztech’s manufactured cameras appearing seven times in the top 10 “Best Sellers in Surveillance & Security Cameras” category on Amazon.com in the US. We see this as a good proxy to gauge the demand from end-customers and order flow from Customer A.
We continue to expect strong demand for its smart security cameras and new wallet share gains from Customer A to drive earnings growth through FY21F-23F.

China recently launched a mass COVID-19 testing programme after detecting two cases of the Delta variant in Dongguan, according to the Business Times. Aztech’s factory in the sub-district of Changping in Dongguan currently accounts for 80% of its production capacity. We understand from management that impact to production has been limited to date, and that 70% of its factory workers there have been vaccinated; full vaccination could be completed by Jul 2021.
Management also expects minimal disruptions to its production in Malaysia due to the movement controls there.

We keep our ADD call on Aztech with an unchanged target price of S$1.91, still based on ~16x FY22F EPS, a premium to Singapore technology sector average, given its high ROE supported by capacity expansion and robust order book providing strong net profit growth potential of ~18% CAGR over FY20F-23F, in our view.
See
New customer wins could re-rate the stock. Key downside risks: execution risks from COVID-19 disruptions.

William TNG CFA CGS-CIMB Research | Darren ONG CGS-CIMB Research | https://www.cgs-cimb.com 2021-06-25

SGX Stock Analyst Report ADD MAINTAIN ADD 1.910 SAME 1.910