Aztech Global - UOB Kay Hian 2021-08-02: 2Q21 Impressive Showing Amid Adversities & Robust Orderbook Growth

AZTECH GLOBAL LTD. (SGX:8AZ)

Aztech Global - 2Q21 Impressive Showing Amid Adversities & Robust Orderbook Growth

Aztech's 2Q21 net profit of S$16.2m (+13.2% y-o-y) was in line. This is commendable amid the lockdowns and movement control orders caused by the pandemic.
2H21 is expected to be sequentially better, supported by Aztech’s growing orderbook on the back of increased demand for Customer A’s products and launches of new IoT products. Orderbook strength improved with orders at S$604.4m as at 30 Jul 21 (20 Apr 21: S$489m, 2 Jan 21: S$271m).
Maintain BUY on Aztech with a target price of S$1.86.

Aztech Global (SGX:8AZ)’s 2Q21 net profit of S$16.2m (+29.6% y-o-y, +22.7% q-o-q) brought 1H21 net profit of S$29.4m (+126% y-o-y) to 38% of our 2021 estimate of S$78m. This was commendable amid lockdowns and movement control orders caused by the COVID-19 pandemic in China and Malaysia.
Aztech's 2Q21 revenue grew 45.6% y-o-y (+15.4% q-o-q) to S$133.7m. This took 1H21 revenue to S$249.7m (+93.4% y-o-y), mainly driven by higher production volume and shipment of IoT and data-communication products (+129% to S$232.6m) due to the successful take-up of products sold by Customer A, Aztech’s largest client, to end-consumers. 2Q21 EBITDA margin held steady q-o-q at 15.8%, but slipped 2.5ppt y-o-y from higher costs incurred on the back of industry-wide component shortage.

Aztech's orderbook strength improved with orders at S$604.4m as at 30 Jul 21 (20 Apr 21: S$489m, 2 Jan 21: S$271m), of which S$150m are scheduled for delivery in 2022. This implies 2H21 revenue of S$450m (+80% h-o-h), assuming all orders are fulfilled and no additional orders come in.

Despite an industry-wide shortage of supply for raw materials, especially semiconductor-related parts and components, Aztech has shown strong bargaining power of its key customer and long-standing relationship with its suppliers. This is evident in the 102% h-o-h spike in raw materials under inventories to S$66.4m, where the company purchased ahead to manage component tightness and to ensure smooth production in 2H21.
In addition, Aztech is able to pass on majority of higher material costs to its customers.

Aztech’s swift response to the tightened movement control order (MCO 3.0) in Malaysia (12 May 21 to 6 Jun 21) to redirect production to its manufacturing plant in Dongguan was commendable. This has helped mitigate the production disruption at the group level during the 3.5-week period. Currently, the Malaysian facility is subjected to a limit of 60% of total workforce since Jun 21.

Despite recent lockdowns, enhancement works at the facility in Malaysia was completed on schedule, and the total built-up area increased from 45,500sf to 86,000sf (+89%).
To recap, management expects demand to increase and has earmarked 26% of the S$189m IPO proceeds to double existing group capacity, with the addition of approximately 500,000sf of production floor space in Johor, Malaysia.

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 continued success in take-up rates of IoT products sold by Customer A. 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 to be launched in 2H21.

Maintain BUY on Aztech with a target price of S$1.86, pegged to 18.4x 2021F earnings.
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We continue to like Aztech as the proxy to high-growth IoT products, where we believe orders are just starting to ramp up in 2021 and would sustain into 2022. Assuming a 35-40% payout ratio, 2021-22 dividend of S$0.04 and S$0.055 would translate into yields of 3.1% and 4.3% for Aztech respectively.

John Cheong UOB Kay Hian Research | Clement Ho UOB Kay Hian | https://research.uobkayhian.com/ 2021-08-02

SGX Stock Analyst Report BUY MAINTAIN BUY 1.860 SAME 1.860