Results

• Aurelius Technologies Berhad (ATECH) posted RM112m f revenue in its 2QFY23 result, which grew 11.2% qoq mainly due to the overall improvement of the global supply chain and logistics.

• 2Q profit in line. The Group has reported RM 7.1m of Profit After Tax in 2QFY23 and 6MFY23 profit has accounted for 37%/36% of consensus and our in-house full year forecast. The experienced slower profit growth in 1HFY23 as production was affected by global supply chain disruption. We expect to see a strong rebound in 2HFY23 on the easing of supply chain disruption coupled with Aurelius’ expanded capacity.

• Profit margins grew on improved contribution from high-margin product mix. The Group’s 2QFY23 PBT margin has grown 3.1 ppts qoq as the overall higher margin is mainly due to larger contribution from IoT and Semiconductor business segments.

• Revenue breakdown of business segments. The Group’s Communication and IoT segment remains its largest revenue contributor after posting RM 93.3m of revenue (+6% qoq, accounted for 83.4% of total revenue), followed by Electronic devices which posted RM 13.1m revenue (+50% qoq, accounted for 11.7% of total revenue) and Semiconductor components posted RM 5.5 m revenue (+45% yoy, accounted for 4.9% of total revenue).

• Revenue breakdown of geographical segment. During the quarter, revenue reported from Malaysia stood at RM 34.9m (- 11% qoq, accounted for 31% of total revenue), Americas reported RM 54.5m revenue (+26% qoq, making up 49% of total revenue), Asia Pacific with RM 12.1m revenue (+78% qoq, accounted for 11% of total revenue) and Europe with RM 10.4m revenue (-7% qoq, making up 9% of total revenue).

• Dividend declared. Atech has declared a 2 sen dividend per share with the announcement of 2Q23 results. The dividend will be paid on 26 Oct 2022 and estimated total RM 7.17m will be distribute.

Comments

• Forecasting a strong rebound in 2HFY23…… The company’s profit is expected to post a strong growth and rebound in 2HFY23 with a strong backlog order (RM421m in  September 2022). Meantime, the situation of supply chain  disruption should improve after the easing of containment  measurement in China as well as normalization of global  economic activity.

• ……with Capacity expansion. We are optimistic that ATECH can catch up on its accumulated backlog order with its capacity expansion plan. As of 2QFY23, the Group has a total of 5 SMT lines with 8 back-end testing facility in Plant 2 and a new SMT line with 2 back-end testing facilities that will commence operation in the next quarter. The Group has ordered an additional 1 SMT line with 2 back-end testing facilities to further ramp up its capability which will roll out in 1HFY24.

• Adoption of Industry 4.0 to cushion the impact of rising labor cost. Atech is in the midst of integrating its production into Industry 4.0 (involving automation, AI, and real-time application in their production lines). Atech has installed full-automated lines in its back-end testing in Plant 2. In fact, staff cost in 2Q23 has increased 12% qoq following by the minimum wages policy. We opine that embracing Industry 4.0 can mitigate the rising labour cost.

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 maintain our BUY call with higher target price on RM2.21 (RM 1.69 previously) as we rollover our valuation to FY24.

• Our target price is derived by ascribing 18x PER multiple to FY24 EPS forecast of 12.3 sen which in line with EMS industry average 1 yr-forward PE. Our target price is rendering a 16% upside form current share price of RM 1.90.

• 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) Embracing industry 4.0 mitigate risks in rising labour cost worldwide.

• Downside risks: - interest rate upcycle causing lower valuation on technology stock, increasing inflationary pressures dent profit margin and recession coming over.

Source: JF Apex Securities Research - 30 Sept 2022