Brokers' take: CGS-CIMB, DBS, UOBKH start coverage on Aztech Global on expected IoT growth

CGS-CIMB, DBS, UOB Kay Hian (UOBKH) initiated coverage on 8AZ : 8AZ 0% with "buy" or "add" ratings and target prices of S$1.91, S$1.85 and S$1.86 respectively. This came a little over a month after the company made its debut on the Singapore Exchange's mainboard on March 12. It opened at S$1.37, 7 per cent or S$0.09 above its initial public offering price (IPO) of S$1.28 per share.

In their respective reports, the brokerages noted that Aztech, which is known for its smart security cameras, could benefit from the growing Internet of Things (IoT) market.

Citing Frost & Sullivan's prediction that the industry could deliver a 20.8 per cent compound annual growth rate (CAGR) to reach US$425.2 billion by 2023, CGS-CIMB believes that Aztech will see future profit increase, as IoT-related income accounted for about 88 per cent of the company's FY2020 revenue. The brokerage forecast an 18.4 per cent CAGR and net profit margins of 11.6 per cent to 11.9 per cent between FY2021 and FY2023.

Meanwhile, DBS projected a revenue growth of 42 per cent in FY2021 and another 30 per cent in FY2022, while UOBKH forecast a a three-year earnings CAGR of 33.8 per cent and revenue CAGR of 33 per cent for 2020 to 2023.

Aztech's average net margins of greater than 10 per cent is already above industry average, but noting the company's continuing efforts to improve productivity and efficiency, DBS also predicted net margins of 11.5 per cent (before IPO expense) and profit growth of 40 per cent in FY2012 and FY2022.

Looking ahead, CGS-CIMB is also bullish on Aztech's prospects as the company is expanding its factory by about 89 per cent to support future volume increases, and potentially start manufacturing a new line of products.

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The brokerage noted that at the end of Q1 2021, the company has secured 11 new customers and projects, of which they are the sole supplier to two new lines of products of a customer, which is a renowned US e-commerce retailer and Aztech's largest customer.

"We believe as consumers continue to invest in the smart home ecosystem, this offers an opportunity for Aztech to further expand its IoT product manufacturing portfolio within the smart home value chain to drive its multi-year earnings runway, in our view," said CGS-CIMB.

After analysing Aztech's track record of more than 30 years, UOBKH believes that the company is able to capture consumer electronics trends. Over the years, the company has continued to adapt its product lines to keep up with fast-changing technological developments.

This, coupled with its diversified manufacturing facilities in China and Malaysia, and "strong" research and development (R&D) capabilities, builds UOBKH's optimism in the company.

DBS also believes Aztech's R&D expertise is a "key differentiator" for the company. With four R&D centres and a 131-strong team, the technology and manufacturing company is expected to develop new products and maintain customer stickiness.

The brokerage estimated that shares of the company are trading at 13.8 times its forecast FY2021 price-to-earnings ratio, while its peers are trading on an average of 17.9 times of that. Based on DBS' projected 38 per cent growth, this means that Aztech is trading at a price/earnings to growth ratio of 0.36 times, or a 64 per cent discount to its peers' average of one times.

UOBKH's valuation found that the company is trading at 18.4 times its forecast FY2021 price to earnings ratio, while CGS-CIMB set its target price based on the assumption that it is trading at 16 times its forecast FY2022 ratio.