AEM Holdings Ltd - CIMB Research 2017-04-25: The Journey Is Just Beginning

AEM HOLDINGS LTD AWX.SI

AEM Holdings Ltd - The journey is just beginning

1Q17 core net profit came in above expectations at 35% of our full-year forecast.
AEM has upped its guidance: 9M17 revenue will be at least S$142m and PBT will be at least S$17.5m.
With the latest guidance, we raise our FY17-19F EPS for higher shipments.

Its net cash balance sheet allows flexibility to add some debt for working capital financing, in our view.
Maintain Add with a higher TP of S$3.39 on higher earnings forecasts and a switch to a P/E valuation (previously P/BV) to better capture the earnings momentum.

1Q17 results came in above expectations with core net profit at 35% of our full-year forecast. This was driven by a 276% yoy increase in revenue in the Equipment Systems business.
One-off items in the 1Q17 results were minor. The 3 major one-offs were an exchange loss of S$0.1m, loss (due to currency translation) of S$0.7m for liquidation of dormant subsidiaries, and S$0.5m in write-back for inventory obsolescence.

In its 4Q16 results commentary, AEM had guided that it expects to achieve at least S$70m in sales and S$6.5m in PBT for 1H17. The company has since updated its guidance and now expects to achieve a 9M17 revenue of at least S$142m and PBT of at least S$17.5m.

Looking at the 1Q17 cash flow, AEM generated S$5.3m in operating cash flow before working capital in 1Q17, a huge improvement over the S$0.3m generated in 1Q16.
However, net cash after working capital changes in 1Q17 was S$2.8m due to higher working capital requirements. We believe AEM’s current net cash position allows it to explore some debt financing to fund its working capital requirements.

In its FY15 and FY16 annual reports, AEM’s chairman said that its product is supporting a multi-year ramp at its key customer. 1Q17’s results lend credence to these statements.
In its 1Q17 results commentary, AEM once again guided for a positive business outlook as the company progresses on its multi-year rollout of its Test Handler platform.

The key share price catalyst is further acceleration of order momentum.
Key risks are order pull back/cancellation by customer, as well execution issues at AEM. The company’s recent order wins have been strong and it would need to manage its production to ensure that quality is not compromised.

As AEM has now proven its ability to execute well on mass production to meet its customer’s demands and based on its latest guidance, we raise our unit shipment assumptions over FY17-19F. This leads to 40-50% rise in our EPS estimates.
To better reflect the earnings momentum, we switch our valuation methodology to P/E (previously P/BV).
We assign a 10x P/E multiple (20% discount to its major customer’s P/E, 34% discount to its key peer, Cohu’s P/E) to our FY18F, leading to a higher TP of S$3.39.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-04-25

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 3.39 Up 2.690