DBS Group Research analysts Ling Lee Keng and Chung Wei Le have initiated coverage on Aztech Global with a ‘buy’ call and target price of $1.85, representing 34% upside.

The analysts are bullish on Aztech’s prospects within the Internet of Things (IoT) market, citing Frost & Sullivan research that projects the global IoT industry to grow at a compound annual growth rate (CAGR) of 20.8% between 2019 to 2023.

Ling and Chung are also positive on Aztech’s net margins which exceed 10% and are above industry average. They point out that strong growth, increased efficiency and new products enable Aztech to increase net margin to 11.5% for FY2020 ended December despite Covid-19.

They project net margins to sustain in FY2021 (before IPO expenses) and FY2022 at 11.5%.

“This should lead to robust earnings growth of about 40% in FY2021 and FY2022, on the back of the strong revenue growth,” they add.

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The analysts also see Aztech’s emphasis on R&D as a key differentiator for the company, enabling it to provide competitive and innovative products for customers. They note that its R&D pipeline includes increasing development work at its Singapore operations and an additional R&D centre in Guangzhou.

Ling and Chung view Aztech’s established track record of over 30 years has made it a leading manufacturer with a robust portfolio of products that it continues to adapt to meet evolving market trends.

In addition, its technological capabilities, combined with its design and manufacturing services, have made Aztech a “one-stop service provider” which helps ensures customer stickiness, the analysts say.

Ling and Chung’s target price of $1.85 is pegged to FY2021 peers’ average P/E of 17.9 times on FY2021 forecasted net earnings of $80.2 million (pre-IPO expense).

“At the current FY2021 P/E of 13.8 times versus earnings growth of 38%, Aztech is trading at an attractive P/E-to-growth of only 0.36 times, circa 64% discount to peers’ average of one time,” they add.

They view that key risks for Aztech include customer concentration risk as the company’s single key global customer accounts for more than 50% of total revenue, as well possible production disruptions due to lease issues with its Dongguan Land production facility.

As at 4.37pm, shares in Aztech are down 1 cent or 0.73% lower at $1.37.