The first major issue that was raised was the debt level of Aztech. This was pointed out to me before by grandmaster89 of CNA forums too, so it was on my mind when I looked through Aztech's past company's announcements.
My initial investigations show that the debt levels only increase in 2008.
Aztech Debt Level
2006: $20 mil
2007: $28 mil
2008: $69 mil
2009: $49 mil
So my initial thoughts were, these debts were likely to be used for their expansion program because Aztech started the program in 2008.
And thus, I went through the 2008 Annual Report strategically with my search button and discovered that, the extra debts were indeed used for funding their construction and purchases of vessels for their new subsidiaries. The management also mentioned that they see no issue with Aztech being able to repay its debts when they are due.
From 2008 to 2009, we also see a reduction in the debt level from $69 mil to $49 mil, showing that the management is indeed actively managing their debt level and reducing it to pre-2007 levels. In addition, Aztech had a 1 for 5 rights issue in 2009, further strengthening their cash position, putting them in better stead to reduce the debt and continue expanding. We did see that in their newest subsidiary Aztech E-lite.
It would be interesting to see how much debt would be left by the end of 2010.
The next issue was about Aztech's recent expansion into sectors not related to their electronics arm. Could a $100mil cap company be so diversified? Why would they want to expand into a different area?
The reasons for expansion could be found in Aztech's 2007 Annual Report:
As part of our long-term growth strategy to enhance shareholder value leveraging on our strong cash flow and balance sheet, the Board and management of Aztech is constantly on a look out for new business opportunities to fuel growth and enhance returns.Sounds good so far. And they did prove themselves so far by being profitable in their first two years of business with the new subsidiaries. Afterall, it was to leverage on their strong cashflow for greater returns.
We believe the above expansion strategies will provide the impetus for a greater growth beyond
what is currently generated by our core business, which will remain our key focus. Aztech will exercise prudent stewardship over our financial resources as we continue to explore other business opportunities to enhance shareholder value.
Aztech might be slowly morphing from a pure manufacturing company into a multi-industry one when they branch into construction materials supply and marine logistics. But as of now, they are still concentrating on their core business, again as seen by their lateral expansion to the LED market.
The next thing which I made a mistake in the previous post is to use Earnings Per Share to estimate if the dividend payout is sustainable. In fact, free cash flow should be used.
From the cash flow statement,
Cash Flow From Operations (Operating Cash)
- Capital Expenditure
= Free Cash Flow
|Year||Cash from |
|Capex ('000)||Free Cash Flow ('000)|
Indeed, the free cash flow isn't very stable, but I would say Capex was rather consistent from 2006 to 2007. The capex spike in 2008 was due to the expansion into new businesses, and in 2009, it was "back to normal". In fact, the free cash flow per share after rights is 2.8 cents per share. If this free cash flow level could be maintained (which I believe it will), the dividends level should also be maintained.
Another concern is the margins of the construction and LED subsidiaries. I dare not say I'm sure of the construction industry, but I'm pretty sure for the LED industry. For LED, it's a lateral expansion of the electronics sector, and complements the core business of Aztech. However, being in the semi-con industry myself, I can safely say that net margins for semi-con are generally very high. Something that costs perhaps 30 cents to make overall can sell for over 20 to 30 bucks... After all, sand, where silicon is extracted from, is cheap. The margin wouldn't be too bad in terms on the manufacturing side. It's the marketing side that I wouldn't be sure of.
This concludes my part 2.