Business Remains Robust; Share Price Weakness Presents Buying Opportunity

We think Aztech’s share price correction of >30% since its IPO in Mar 21 is overdone. It has been delivering solid results (9M21 earnings grew 55% yoy) and we expect 2021/22 earnings to grow 33%/22% yoy. We understand that Aztech’s operations remain intact and order-book remains healthy. We reduced our 2022 EPS by 9% to reflect a more conservative view. Our target price fell 9% to S$1.55, pegged to peers’ average of 13.3x 2022F PE. Maintain BUY. Target price: S$1.55.

WHAT’S NEW

  • Recent share price correction presents good buying opportunity. Aztech Global’s (Aztech) share price has corrected by more than 30% since its IPO in Mar 21, where the majority of its correction took place in the last two months of 2021. We believe the correction is attributable to three factors: a) concerns over components shortages, b) fear of labour issues as one of Aztech’s industry peers, ATA IMS Bhd (AIB MK) suffered a massive share price correction after its largest customer stopped ordering from AIB MK due to labour infringement issues, and c) year-end portfolio rebalancing by institutional investors in paring down underperforming holdings.

  • Operations remain intact with healthy orderbook. We understand that Aztech’s facilities are currently enjoying high utilisation rate and it is managing the components shortages well on the back of: a) leveraging the strong brand name of customers, b) maintaining its good long-term relationship with suppliers, and c) modifying the product designs to switch reliance to parts that are more readily available. The sequential improvement in net margin also proves Aztech’s ability to manage the components shortages well (11.4% in 1Q21, 12.1% in 2Q21 and 12.8% in 3Q21). In addition, we also note that Aztech’s orderbook remains healthy, where orderbook strength improved with orders at S$636m as at 14 Oct 21 (1 Oct 21: S$569m), of which S$426m are scheduled for delivery in 2022 and S$210m for 4Q21.

  • Optimistic on 4Q21 performance and recent share buyback a vote of confidence. Based on its latest business update, Aztech is optimistic on the outlook taking into consideration the healthy demand for IoT products, improving vaccination rate, strong orderbook and steps that were put in place to minimise production disruption due to power usage regulations. On the other hand, as a vote of confidence, Aztech has bought back 1.87m shares (0.24% of total shares) since the approval of its share buyback mandate on 13 Oct 2021. In addition, the major shareholder, Mr. Mun Hong Yew has also acquired approximately 0.5m shares in Aug and Sep 21.