FY22 Results Highlights

Strong surge in FY22 revenue. Aztech reported a 31.4% y-o-y increase in revenue to S$820.2m for FY22, on the back of increased demand from customers. Revenue was driven by a 34.3% growth in the sales volume of IoT devices and data communication products, which contributed 97.7% of the group’s total revenue. The remaining revenue was derived from LED lighting products and other electrical products that reported a decrease of 32.2% in sales, as the group has shifted its focus to IoT devices.

Bottom line hit by forex loss. Net profit, however, declined 9.7% y-o-y to S$67.2m, impacted by a loss of $56.6m resulting from foreign currency contracts entered into by the group. Majority of these contracts had been settled as at 31 December 2022, with 2.5% of the contracts to be settled in 2023. The tax rate of 16.8% is also higher than the 12.5% in FY21, which is when the company benefitted from the full utilisation of the tax incentive by the group’s operations in China. As a result, its net margin eased to 8.2% in FY22, from 11.9% in FY21. Excluding the forex loss, FY22 net profit would be S$123.8m (+66.4% y-o-y), with a net margin of 15.1%, as the group benefitted from productivity and operational efficiency gains while various cost control measures were in place.

Measures in place to manage forex risk. Going forward, the group would adopt a more conservative approach to managing forex exposure and will hedge only operational needs denominated in foreign currencies. It has also established a risk management framework with limits on duration and quantum.

FY22 core results above expectations. For 4Q22, revenue eased 8.7% to S$213.3m while net profit plunged 87% y-o-y due to the forex loss. Overall, FY22 revenue was 9% above our expectations but the net profit of 19% was below our projections, after accounting for the forex loss.

A second and final DPS of 1.5 Scts (5 Scts in FY21) was declared, bringing full-year DPS to 4.5 Scts, or a payout ratio of 51.7%, similar to FY21.

Robust orderbook scheduled for completion in FY23. The group’s orderbook remains strong at $633.9m as at 31 December 2022. It has since received additional orders valued at $84.7m as at 17 February 2023, thus bringing the total orderbook to $718.6m, scheduled for completion in FY23. We can look forward to more contracts being booked for FY23, as order lead time is getting shorter with the easing of supply chain disruptions.
No risk to Dongguan land, at least till March 2025. The Changping Town Government has further extended the lease for the Dongguan land to March 2025. During this period, the lease shall not be affected and the building will not face any risk of demolition.

Healthy balance sheet to capitalise on growth opportunities in IoT industry. The group has cash of $216.2m and net cash of $210.9m as at 31 December 2022. This should help support the group’s growth plans going forward and also help to capitalise on the growth opportunities in the IoT industry, partly fuelled by growing e-commerce platforms.

New plant in Malaysia to ride on the trade diversification trend and support future growth. The new Pasir Gudang manufacturing plant in Johor, Malaysia, is expected to commence operations by 2Q23. This plant can cater to the anticipated growth in demand from its existing and potential new customers, and provide production diversification for customers looking to expand their geographical manufacturing footprints.

Raised FY23F/FY24F earnings by c.30% each. On the back of its robust orderbook and still healthy net margins, despite the inflationary pressure, we have raised FY23F/FY24F earnings by c.30% each. We have upped our revenue projections for FY23F to FY24F by c.13% each and pencilled in a higher net margin assumption of 13% for FY23F and 13.6% for FY24F, from 11.4% and 11.5% previously, respectively, vs. 15.1% in FY22 (excluding the forex loss). The net margins for FY23F are projected to be lower, as the new plant in Johor is only expected to reach full production towards the end of FY23F. There could be some mismatch of costs and revenue, especially fixed costs, as the bulk of revenue is only expected to come in 2H23 and beyond.

Maintain BUY call on Aztech with a higher TP of S$1.15 (previously S$1.02), pegged to 7x PE, c.-0.5SD of its average PE since listing, on FY23 earnings. Current valuation of 5x FY23F PE is very attractive, at below the average PE of c.9x.