Aztech Global - UOB Kay Hian 2021-06-25: Production & Customers’ Demand Remain Intact

AZTECH GLOBAL LTD. (SGX:8AZ)

Aztech Global - Production & Customers’ Demand Remain Intact

We hosted a conference call with Aztech’s management team. The key takeaways are:
1. its manufacturing plant in Dongguan has not been affected by the recent COVID-19 outbreak,
2. production in Malaysia has seen limited impact from the tightened MCO, and
3. Aztech continues to see healthy demand from its key customers, with orders going as far as 2022.
Further improvement in profitability track record should help Aztech rerate upwards. We maintain BUY and target price of S$1.86.

We understand that Aztech Global (SGX:8AZ)'s manufacturing plant in Dongguan has not experienced any disruption in production for the entire 1H21. Also, 70% of the staff in the plant have been vaccinated, with a target to reach full vaccination by end-Jul 21.
In addition, Aztech has put in place various prevention measures such as restricting outside visitors and only allowing its own staff to handle cargo. To recap, Aztech’s Dongguan plant accounts for 80% of the group’s total production.

Malaysia implemented a tightened movement control (MCO) on 22 May 21,which allows only 60% of workforce to be on the factory’s premises. Despite a temporary reduction in production output, Aztech sees limited impact on the group’s top-line as its Dongguan plant is able to compensate the production.
On the other hand, Aztech is phasing out low-margin products to free up more capacity for better-margin products.

Aztech continues to see robust orders from its key customers with orders lasting until 2022. In addition, Aztech is working on several new products with its key customer, with production commencing in 3Q21. Compared with larger competing manufacturers, Aztech has advantages in its ability to provide more dedicated services and work closely with the design team of its key customer.

Despite an industry-wide shortage of raw material supplies, especially semiconductor-related parts, Aztech continues to fare well thanks to the strong bargaining power of its key customer and long-standing relationship between Aztech and its suppliers. In addition, Aztech is able to pass on higher material costs to its customers.

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.

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.

Of the S$189m new funds raised in the 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.

Maintain BUY call on Aztech and target price of S$1.86, pegged to 18.4x 2021F earnings, 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 yields of 3.0% and 4.1% respectively.
See

John Cheong UOB Kay Hian Research | Clement Ho UOB Kay Hian | https://research.uobkayhian.com/ 2021-06-25

SGX Stock Analyst Report BUY MAINTAIN BUY 1.860 SAME 1.860