Attractive despite margin pressure
Margin pressure a near term concern
Expect margin compression trend to continue. In 1Q22, Aztech reported a lower net margin of 10.8%, down from 11.4% in 1Q21 and 11.9% in FY21, mainly due to inflationary cost pressures and supply chain
bottlenecks. With rising inflation, still challenging supply chain environment, and lockdowns in China in 2Q22, we expect further margin pressure for Aztech in 2Q22. 1H22 results will be released on 25th July after market close. The bulk of Aztech’s manufacturing facilities are in Dongguan, China. Though not directly impacted, it could be affected by suppliers from other parts of China.
Revenue supported by orderbook of S$713m as at April. On the revenue front, the orderbook as at 31 March 2022 was S$677.4m, and the group has since received additional orders of $35.6m as at 18 April 2022. The majority of the S$713m orders secured to date is scheduled for completion in FY2022.
Aztech’s products are mainly in the IoT space. The IoT industry is still at its nascent stage of growth now. According to Gartner, the global IoT market opportunity across endpoint electronics, communications services, edge device security, application software, infrastructure software, and IT services is expected to grow at a 2020-2025 CAGR of 15.8%, driven by improvements in technology and the higher usage of connected devices. Aztech, with c.90% revenue exposure to the IoT segment, is poised to ride on this rising trend.
Lingering concern on weak consumer sentiment. However, demand for electronic devices has been relatively weak in recent months. This trend could continue, mainly on the back of the increasing rate of inflation around the world and also the rising risk of recession.
Toned down earnings by 3% to 4% each year. On the back of the persistent margin pressure and risk of weakening demand, we have trimmed earnings for FY22F and FY23F by 3% to 4% each. There is no change in revenue projections for FY22F as this is supported by the current orderbook. Revenue for FY23F is reduced by 3.5% on anticipated weaker demand. We have also reduced the net margin assumption for FY22F to 11.0% from 11.4%, and 11.4% from 11.5% for FY23F, on the expectation of a further margin compression.
Maintain BUY with lower TP of S$1.18. Our TP is lowered to S$1.18 (previously S$1.33). This is on the back of the lower earnings and is also pegged to 11x peer average (from 12x previously on further de-rating of tech stocks), on FY22F earnings. Maintain BUY.