Result

• Higher topline. Aurelius Technologies Berhad (ATECH) posted RM106.6m revenue in its 4QFY22 result which soared 25.1% qoq. This was mainly driven by the improvement from the supply disruption of raw material and the resumption of 100% operation capacity approved by MITI which propelled the production, resulting in the QoQ revenue growth.

• Operating expenses dragged bottom line. ATECH recorded a 4QFY22 PATAMI of RM5.1m, - 24.1% qoq mainly attributed to higher operating costs such as the one-off IPO expenses (RM1.36m), higher depreciation cost due to additional SurfaceMount Technology (SMT) line which was not fully utilized as at quarter end, forex loss as weakening MYR to USD and etc.

• Earnings slightly below expectation. The Group’s FY22 full year PATAMI of RM22m was slightly below the street estimate (accounted for 93% of full year forecast) and our forecast (91%) despite revenue met respective forecast. This was mainly due to the unexpected higher operation cost arising from the overtime labour cost and higher number of employees being quarantined during the quarter with the rising Covid cases.

• Communication and IoT products remained the key contributor. The segment recorded RM95.6m revenue and RM7.9m gross profit in 4QFY22, contributing 89.6% and 75.1% of total Group’s revenue and gross profit.

• Semiconductor business segment growing gradually. The Semiconductor component segment posted RM4.1m revenue and RM2.1m gross profit in 4QFY22, +44% and +31% yoy respectively. Overall, the contribution of the Group’s bottom line by the Semiconductor segment was 19.5% vs 17.1% in the previous quarter (3QFY22).

• Write back of tax due to additional tax incentive. There was a tax return of RM0.6m in this quarter due to the overprovision for taxation in 3QFY22, stemming from the reinvestment allowance for additional SMT machine installed during the 4Q. Thus, the effective tax rate for FY22 was 15% (lower than statutory tax rate of 24%).

Comments

• Promising outlook of semiconductor component segment. The superior profit margin posted by the Semiconductor segment as compared to other segments are expected to expand the profit margin of the Group as a whole in the coming quarters following its aggressive capacity expansion plan. In January 2022, ATECH installed 4 new SMT production lines with 6 automated backend lines and plan to invest additional 3 SMT production lines to cater for the growing demand in FY23.

• Eyeing efficiency of production from the Manufacturing Execution System (MES) upgrade towards Industry 4.0. ATECH expects to spend RM4m over the next 3 years to upgrade their manufacturing systems mainly in software and system integration to create a network providing real time information of operation and monitoring. This is expected to improve the efficiency of production and further enhance the profit margin.

• Lower risk of ESG concern on labour issue. The ESG concern is gaining traction and has disrupted EMS industry in Malaysia (apart from sectors such as rubber glove and plantation) as several EMS companies have appointed related consultants and are working hard to address this. On the contrary, ATECH has a relatively low risk as compared to its peers as the Group employs all local residents as its workers and able to avoid the issue on alleged mistreatment of foreign labour.

• Cautiously optimistic for FY23 amidst some headwinds. The global shortage on semiconductor components, labour supply shortage, rising cost of raw material and freight charges, minimum wage increase effective 1 May 2022 could pose a challenge to the Group. Having said that, the encouraging order book of approximately RM523m, economic recovery in view of border reopening and the capacity expansion would underpin the Group’s earnings moving forward.

Earnings Outlook/Revision

• We increase our earnings forecast for FY23F by 12.8% to RM33.6m from RM29.8m on the back of rising profit margin which will be supported by the growing Semiconductor business segment. Meanwhile, we take this opportunity to introduce our FY24F net earnings of RM 43.9m on the back of capacity expansion and diversification of new product offerings to cover Ion Lithium battery pack system.

Valuation/Recommendation

• We downgrade the stock to HOLD from BUY call after the share price has rallied 42% since its IPO and our initiate coverage. However, we raise our target price to RM1.83 from RM1.74 following our earnings revision. Our valuation is now pegged at PE multiple of 19.5x of its FY23F EPS of 9.4 sen. This is in line with its peers which are currently trading at 15-20x forward PE.

Source: JF Apex Securities Research - 31 Mar 2022