Result

• Aurelius Technologies Berhad (ATECH) posted RM100.7m revenue in its 1QFY23 result which dropped 5.5% qoq mainly dragged by the supply chain shortage affected the production.

• Global semiconductor shortage caused lower sales in Communication and IoT products. The segment has reported RM 88.3m during the quarter which -8% qoq was mainly dragged by delayed of production due to shortage of material.

• Lower GP margin. During the quarter review, the Group has accounted the GP margin as 7% which drop 2.4ppts qoq. The lower margin was due to lower product mix margin in Communication and IoT products segment.

• Slower Profit is expected. The Group has reported RM 5m of Profit After Tax in 1Q23 which accounted for 15% of consensus and our in house full year forecast stood at RM 33.3m/RM 33m. However, the slower profit growth is expected in 1HFY23 as production affected by global supply chain disruption. We are expecting to see a strong rebound in 2HFY23 on the ease of supply chain disruption with the easing of restriction of China government start on June 2022.

• Sales drop from Americans customers but cushioned by Europe customers. During the quarter, the revenue reported by Americans operation remain largest contribution to the Group (43% of total revenue) but sales drop 17% qoq. However, the drop is sales was buffered by Europe sales (11% of total revenue) which surge 36% qoq.

• 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 1Q23. Thus, the effective tax rate in current FY is expected lower than the statutory tax rate as there are more SMT machine installing in the coming period.

Comments

• A weak but slightly better than 1Q performance expected in 2Q22. The ongoing supply chain disruption is envisaged continue dragged Q2 performance, but will be better than Q1 as eased of containment measure in China start on June 2022 coupled with the capacity expansion from factory extension done in 28 March.

• Forecasting a strong rebound of 2H23…… The profit is expecting to have a strong growth and rebound in 2H22 with the strong backlog order (RM504m stood in May 2022). Meantime, the situation of supply chain disruption should be improve backed by easing of containment measurement in China as well as normalization of global economic activity.

• ……with Capacity expansion. We are optimistic on ATECH can be catch up the accumulated backlog order with the capacity expansion completed. Meanwhile, the 5th and 6th SMT line are expecting to be install by July and September 2022 to serve Customer F in China by manufacture semiconductor components.

• Does not over worry on the rising input cost…… We are expecting the input and operation cost of the Group will be on increasing trend in near term mainly due to increase of labour cost, material cost and utility cost. However, We are still optimistic on the margin and bottom line of ATECH as we confident the Group are with the ability to pass the costs to customers especially on the material cost.

• …… Profit margin should be improve moving forward. With the aggressive capacity expansion by manufacturing Semiconductor components with higher profit margin (average 50% GP margin in 4Q22), the Group’s profit margin are expected to increase in coming period. Our GP margin forecast is stood on 14.3% in FY23F and further grow to 15.7% in FY24F) comparing to 11.1% in FY22 with the higher Semiconductor components business contribution.

Earnings Outlook/Revision

• We keeping our net earnings forecast for FY23F on RM33.6m and FY24F net earnings on RM 43.9m.

Valuation/Recommendation

• We upgrade the stock to BUY from HOLD call after the share price has dropped approximately 30% since April 2022 and our last report on ATECH due to valuation revision on technology stock globally. However, we revise down our target price to RM1.69 from RM1.83 due to lower PER assigned on the consideration of the downside risks interest rate upcycle, increasing inflationary pressures and recession coming over. Our valuation is now pegged at PE multiple of 18x (19.5x previously) of its FY23F EPS of 9.4 sen. This is in line with its peers which are currently trading at 18x 1yrforward PE.

• We favours on the stock due to:- 1) Strong profit growing prospects with massive expansion. 2) Expecting Margin enhance with higher product mix from Semiconductor components. 3) Lower risk on ESG concern comparing to peers due to nearly zero dependence on foreign labour

Source: JF Apex Securities Research - 30 Jun 2022