Investment Highlights

• We initiate coverage on Aurelius Technologies Berhad (ATech) with a BUY call and a target price of RM1.74. The stock will go for Main Market listing in Bursa Malaysia on 16 December 2021. We favour the stock mainly due to: 1) Expansion into semiconductor component segment which renders strong growth as compared to other Electronic Manufacturing Services (EMS) players who are mainly or solely focusing on consumer electronics (i.e. home appliances segment excluding electronic devices); 2) ‘Relatively Environmental, Social, and Governance (ESG) compliance’ and less prone to foreign worker dispute as the Group employs 100% local workers, against its peers who rely heavily on foreign labour; 3) diversified customer base as top five clients contribute c.90% of its total revenue, and 4) New production facility is underway to spur immediate future growth with an annual capacity to be increased by 198.7% to 5.87m by end CY23. 

• Well established EMS player with business stemming from different regions. ATech is an EMS provider for industrial electronic products through its subsidiary, BCM Electronics. ATech offers end-to-end EMS solution from high volume board assembly up to finished products. The Group is located at Kulim Hi Tech Park industry and has established track record for 28 years. The business is geographically diversified across three continents in Asia Pacific, America and Europe.

• Long-term relationship with global clients and diversified customer base. The Group has established long term relationship with top five global clients and contributed c.90.9% of its total revenue during FY21. The top five major long-term customers were globally and locally renowned customers (Customers A, B, C, D and E) which came from various countries such as Malaysia, USA, Singapore and Germany, focusing on Communication devices, Communication IoT devices and Telematic instrumentation devices. These customers have been dealing with ATech between 10 to 28 years. As for 7MFY22, most revenue was mainly derived from Customer A (22.8% of total revenue). We deem demand from existing clients to remain strong going forward given long-term relationship as we reckon that ATech’s engagement with their existing clients is solid and up to scratch.

• Expansion into semiconductor component segment. ATech focuses on three business segments which are Communication & IoT products, Electronic devices and Semiconductor components. Most of the revenue was mainly come from Communication & IoT products which made up 77% to 89% to the overall revenue for the past three years. Additionally, the Group has expanded into new segment which is semiconductor component manufacturing services in Jan’20, after securing service agreement with the new customer in China, Customer F in Aug’19. This new segment is expected to contribute significantly to the overall growth as the Group intends to expand their production line, expecting to have total seven production lines by end CY23 (vs existing four production lines which were installed), to cater strong product demand from Customer F.

• Production facility expansion to spur growth. ATech’s existing plant has annual production capacity of 1.97mil placement point with 94% utilization rate (as at FY21). The Group has constructed new single-storey manufacturing plant on the vacant land of 3 acres, next to their existing plant. The cost to construct new plant is RM18m and funded via internal generated fund and bank borrowing. The plant was started construction in May’21 and expected to commence operation in 1HFY22. At that time, ATech’s annual capacity will increase by 198.7% to 5.87m placement points by end CY23. Construction of new plant is to cater demand from existing clients as well as development of new products, lithium-ion battery pack system. Also, the Group purchases new machinery and equipment to improve their efficiency and capabilities. ATech intends to purchase four more SMT lines and are expected to be installed by mid-23. Moreover, ATech aims to increase their automation rate in order to upgrade its manufacturing facilities towards industry 4.0 such as investing into automated material handling system and automated backend inline testing and packaging.

• No exposure on foreign worker issue. Notably, all of ATech’s workers are local workers. We are positive on this as most EMS players in Malaysia are heavily relied on foreign workers and were plagued into ESG issues on alleged mistreatment of foreign labour. Therefore, ATech has less risk on ESG issue as compared to its peers and not facing any shortage of workers.

• Robust earnings growth for 7MFY22. As of 7MFY22, the Group’s revenue grew 7.8% yoy whilst PBT soared 150.1% yoy. Strong sales were spurred by higher revenue from electronic devices segment (revenue: +135.5% yoy) as well as semiconductor components manufacturing segment (revenue: +312.1% yoy). Encouraging growth from semiconductor component segment was spurred by massive orders from Customer F which was in line with the increase of production capacity.

Valuation/Recommendation

• We derive a target price of RM1.74 for ATech. Our valuation is based on 21x of FY23F EPS of 8.3sen, which is 27.8% discount from industry average forward PE of 29.1. Our fair value of the stock renders 28% upside against the IPO price of RM1.36.

Key Risks

• Dependent on purchase orders with major customers.

• Disruption in global supply chain may affect business of the Group.

• Possible delay in future plans due to prolonged Covid-19 pandemic.

• Fluctuation in foreign exchange rate.

Source: JF Apex Securities Research - 14 Dec 2021