2Q22: Earnings Beat Due To Higher Productivity; Orderbook Remains Healthy
Aztech’s 2Q22 net profit of S$29m (+79% yoy / +109% qoq) is above our forecast due to stronger production volume in the absence of production disruption. IoT devices continued to be a key growth driver, which drove revenue growth of 77% yoy. Orderbook grew 16% to S$827m as at 25 Jul 22 vs S$713m as at 18 Apr 22; S$450m is planned for completion in 2H22, indicating a strong 2H22. Also, Aztech is optimistic on its outlook. Maintain BUY with a 6% lower target price of S$1.46
RESULTS
• 2Q22 earnings beat due to stronger productivity in the absence of production disruption. Aztech Global’s (Aztech) 2Q22 net profit of S$29m (+79% yoy/+109% qoq) is above our forecast of S$18m due to productivity and operational efficiency gains arising from fulfilment of critical mass orders at its manufacturing facilities in Dongguan, China and Johor, Malaysia. The strong results were also aided by efficient coordination of components availability, execution and delivery of customer orders. To recap, manufacturing operations in Dongguan were suspended from 15-20 Mar 22 to support the testing for COVID-19 and prevention of the further spread of COVID-19 infection.
• Orderbook remains strong with three-pronged component management approach for component tightness. Orderbook remains strong as it grew 16% to S$827m as at 25 Jul 22 vs S$713m as at 18 Apr 22; S$450m is planned for completion in 2H22, indicating a strong 2H22. Also, Aztech is continuing with a three-pronged approach to manage component tightness: a) actively collaborate with customers on design changes to use alternative components, b) leveraging close working relations with suppliers, and c) expanding base of alternative suppliers.
• Optimistic on 2022 business outlook. With several mitigation measures and growth focuses in place to fortify its business resiliency, Aztech expects its operations to benefit from: a) a long-term global demand for IoT and data communication products, b) strong orderbook secured, and c) robust balance sheet to support growth.
STOCK IMPACT
• Commitment to 2022 focus areas. Aztech is committed to fortifying its business resiliency through five key focuses to pivot growth and diversification across multiple sectors powered by the IoT trend. The five key focus areas are: a) target to achieve 10% of 2022 revenue from new customers and widen its portfolio of high-quality customers, b) deepen IoT expertise and capabilities in anticipation of new demand, including the expansion of manufacturing capacity with a green facility outside of China, c) optimise factors of production and output through application of data analytics, d) integrate sustainability into its business model and strategic formulation to future-proof business resiliency, and e) maintain healthy gross debt/equity ratio of ?20% and ensure adequacy of financial resources for operational and expansion needs.
EARNINGS REVISION/RISK
• We have kept our financial estimates unchanged.
VALUATION/RECOMMENDATION
• Maintain BUY and with a 6% lower target price of S$1.46, pegged to 12.5x 2022F earnings (reduced from 13.3x previously due to derating in peers’ valuation), which is still based on the Singapore and Malaysia peers’ average. We continue to like Aztech as the proxy to high-growth IoT products, where we believe orders are starting to ramp up in 2022 and would sustain into 2023.
SHARE PRICE CATALYST
• More order wins.
• Better-than-expected cost management.
• Earnings or dividend surprise.
