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Aztech Systems: Better outlook for 2H07

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Broker House: NRA Capital
Analyst: Foo Sze Ming
Price: $0.67
Target : $0.80
Recommendation: BUY
Upside: 19.40%

Summary:

Revenue grew 12.9% yoy attributable to the strong demand for ADSL2+ products and HomePlug but contribution from the Contract Manufacturing (CM) segment was flat for the quarter. For the period, net profit rose 2.6% yoy to S$5.2m. Operating cashflow remained strong in 2Q07. Despite the production hiccup due to purchase issues of major components which led to the surge in inventory, operating cashflow grew 51.8% from S$2.3m (2Q06) to S$3.5m (2Q07) due to better cashflow management of receivables and payables.Aztech’s order book remains strong. Year-to-date orders rose from S$138.0m in 1Q07 to S$202.0m currently, of which S$117.6m had been fulfilled in 1H07.

Growth in OEM/ODM segment in 2H07 will be driven by the continuing demand for ADSL2+ and HomePlug. The ADSL2+ contract with a large USA Telco will continue into 2H07 and drive ADSL modem shipment to a record high in FY07. Demand for HomePlug remains strong. Aztech also started shipment of the first 70,000 HomePlugs to a satellite service provider in USA and is also supplying HomePlugs for an IPTV service provider in Singapore.

Aztech is well-positioned to move along with the technological advances in the broadband industry with its capability and commitment in R&D. With Aztech’s network of Telcos and equipment providers in Europe in the area of ADSL, it could tap on this strength to grow its new VDSL products. In addition, Aztech is also looking into the development of new products such as higher speed 1Gbps FTTH modem.

We are now raising our FY07 revenue and net profit forecasts to S$311.9m (previously S$285.5m) and S$25.0m (S$24.1m) based on our expectation of continuing strong demand for ADSL and HomePlug into 2H07, delivery of the delayed orders of S$13.0m and the picking up of the CM segment. Our RCFderived fair value has been raised to S$0.80 (previously S$0.54). On top of a projected FY07 dividend yield of 2.8%, projected total return of Aztech will be 22.2%. Maintain BUY.




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