Brokers' take: Analysts lower targets for Aztech Global post FY2021 results

DBS Group Research and Maybank Securities have cut their price targets for Aztech Global 8AZ while maintaining their "buy" calls on the mainboard-listed tech products company, following the release of its FY2021 results on Tuesday (Feb 23).

After trimming its price target to S$1.54 from S$1.67 earlier in February, DBS has reduced it further to S$1.48.

In a research note on Wednesday (Feb 23), DBS analyst Ling Lee Keng said the new price target comes after factoring in lower gross margin assumptions, which have resulted in a 4 per cent downward earnings revision for both FY2022 and FY2023.

The target is pegged to a peer average of 12 times FY2022 earnings estimates.

DBS's net margin assumptions for the company have also been lowered slightly to 11.5 per cent for FY2022 and 11.6 per cent for FY2023, compared with 12 per cent previously for both fiscal years.

This nonetheless remains above the industry average, said Ling, who believes the projected net margins should lead to earnings growth of 28 per cent and 20 per cent for FY2022 and FY2023, respectively.

Commenting on Aztech Global's "remarkable" set of FY2021 results that came in line with DBS's expectations, Ling noted that gross margin for the full year ended Dec 31, 2021 was a weaker 24.9 per cent as opposed to 28.5 per cent in FY2020 amid supply chain challenges.

The analyst however noted that the group's overall net margin remained strong at 11.9 per cent, which is above the industry average.

She also continues to like Aztech Global for its strong outstanding order book, which stood at an improved S$762 million as at Feb 22, 2022 compared with S$496 million as at end-2021.

"Though the situation has improved from last year, the group still faces component shortages and logistics challenges due to factors like port congestion and shortage of workers. As we are still in the early part of the year, we expect the group to secure more orders for fulfilment in 2022," said the analyst.

While Aztech Global's results beat Maybank's expectations for H2 FY2021, the brokerage has trimmed its price target by 10 per cent to S$1.13 from S$1.26 as it sees a risk in the company being unable to fulfil its current order book due to component shortages.

Maybank analyst Lai Gene Lih noted in a Wednesday report that the valuation of 10 times FY2022 earnings estimates represents a 15 per cent discount to the stocks' global electronics manufacturing services peers, which are trading at about 11.7 times.

As the availability of certain components remains tight despite a slight improvement in chip shortage, Lai believes the group will continue to face earnings risks - even if it is likely to continue winning new orders throughout the year.

The analyst is also concerned over the longer-term prospects of commoditisation-driven margin erosion of the Internet of Things products for Aztech Global's main customer, which he estimates to have contributed to more than 70 per cent of the group's H2 revenue.

"If chip shortages dissipate materially and the demand outlook remains strong, we see room for upward revisions in our estimates, and this could also be a material catalyst for the stock," he said.

Shares of Aztech Global were trading S$0.045 or 4.9 per cent higher at S$0.96 as at 2.30 pm on Wednesday.

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