On track for growth in FY22F

■ We think Aztech saw a pickup in production in 4Q21F and did not experience any hiccups due to Covid-19, power shortage or flooding in the quarter.
■ In our view, 4Q21F net profit could have rebounded by 43.6% qoq (+2.6% yoy) to S$25.9m.
■ We think the order outlook for FY22F remains robust. We reiterate Add but TP is lowered on rollover to FY23F as sector valuations have de-rated.

4Q21F net profit could have increased 43.6% qoq

We believe that Aztech’s operations did not experience any adverse impact (factories are in China and Malaysia) in 4Q21F, from Covid-19, labour shortages or the flooding in Malaysia. We think that production activities have gathered pace in 4Q21F and Aztech could report a net profit of S$25.9m for 4Q21F, a sequential 43.6% growth. On a year-onyear basis, 4Q21F net profit growth could be a milder 2.6%. This should be read in the context of a strong 2H20 as Aztech’s China factories were shut for a longer period over the Lunar New Year in 2020 due the Covid-19 pandemic. 1Q20 net profit was S$0.6m.

We think FY22F order books are strong

On 14 Oct 2021, Aztech had an order book of S$426m which the company targets to complete in FY22F. Given the component tightness, we think its customers are now placing orders earlier in the year to reduce potential hiccups in their product supply. Hence, we could see a stronger order book update when Aztech releases its FY21F results (last year’s order book on 2 Jan 2021 was S$270.7m). Margin-wise, we see Aztech being able to defend its profit margin as the company has design capabilities and thus can help customers mitigate the component shortage issue with product/component redesign. In our view, there is also room for further automation to combat rising wage cost in China and Malaysia.

Need to diversify its customer base

Currently, we think that orders from its major customer (more than 50% of 1H21 sales) remains robust. We think that Aztech is widening the product range with this customer. Other possible sectors we think that Aztech could be exploring include healthcare-related products and electric vehicle related electronics such as modules or charging stations.

Market valuation has de-rated

We rollover to FY23F EPS (previously FY22F EPS). Although our forecasts are unchanged, valuations of tech-related manufacturing stocks have de-rated due to concerns of rising interest rates. Based on the current FY23F sector P/E of 12x (previously FY22F sector average P/E of 15x), our target price is reduced to S$1.59. Downside risks to our call are component shortages and Covid-19 related supply chain disruptions (complete factory shutdowns in China if Covid infections are discovered cannot be ruled out). New customer wins and stronger earnings could re-rate the stock.