Aurelius Technologies (ATech) will raise MYR105m from its IPO to fund its ambitious expansion plan and
deleverage. The forecasted explosive 3-year earnings CAGR of 36% is premised on robust job orders from existing customers, and progressive contributions from a new one in the semiconductor space. Priced at a >20% discount to the EMS sector average, RHB believes its valuation is attractive – considering the earnings growth and promising prospects, while the 100% local labour force should alleviate intensifying concerns on migrant workers.
ATech has transformed and ventured into the semiconductor arena in FY20 after securing an electronics manufacturing services (EMS) agreement with the Customer F. Revenue from the semiconductor product surged to MYR5.3m in 7MFY22 from MYR1.3m in 7MFY21, following the ramp-up in production and the group recorded a gross profit of MYR3m (GPM: 57%) from a loss a year ago. After adding two more production lines in August and October to bring the total to four, ATech is aiming to further increase the production lines to seven by end- 2023 to accommodate the volume demanded by Customer F. As such, RHB expects this division to contribute more significantly going forward, and consequently lifting group margins. RHB forecast net margin to expand to 8.2% in FY23, from 6.6% in 7MFY21.
Massive capacity expansion to anchor long-term growth. ATech has set aside MYR16m to build a new plant – of which construction began in May, and operations are expected to commence by 1H2022. The new plant, which is adjacent to ATech’s existing one, will extend the group’s total floor space by 61.9k sq ft, or by c.69% to 132.8k sq ft. The additional space will house production that caters to additional volume from existing customers, whilst providing more capacity for ATech to secure more customers. This should support its forecasted 3-year revenue CAGR of 9%. It will also enable ATech to further diversify its product offerings to cover lithium-ion battery pack systems. On this, the group is in the development phase and working in collaboration with a third party – it expects to begin commercial production by end-2022.
Notwithstanding the relatively smaller profit base vs other EMS peers, RHB believes ATech’s valuation may catch up to that of its competitors, due to a more compelling risk-reward profile. This is considering the factors of semiconductor exposure and a 100% local labour force – the former provides a sustainable uplift to margins, whilst the latter spares ATech from issues related to migrant workers. Essentially, RHB highlights that ATech has complied with the code of conduct set by Responsible Business Alliance (RBA), the world’s largest industry coalition dedicated to corporate social responsibility in global supply chains. On top of that, ATech is upgrading its facilities towards Industry 4.0 – encompassing the use of automation, artificial intelligence, Internet of Things (IoT) and real-time data – to increase productivity and reduce its dependence on human labour.
Risks to its recommendation include a change in customer concentration, major disruptions to the supply chain, and delays in its expansion plans.
RHB
