AEM Holdings Ltd - CIMB Research 2017-07-04: Visible Growth Ahead

AEM HOLDINGS LTD AWX.SI

AEM Holdings Ltd - Visible Growth Ahead

AEM is a leading semiconductor test handler supplier and the sole source for a major semiconductor company.
We project that AEM is on track to 311% yoy core EPS growth in FY17F, backed by 3.3% dividend yield and a net cash balance sheet.
AEM is a possible M&A target, in our view.

Room for margin improvement as production shifts to lower-cost Penang.
Trading at undemanding 6.4x FY18F P/E and 5.8x FY19F P/E despite projected core FY18/19F EPS growth of 19%/11%.

AEM Holdings Ltd (AEM) is a leading semiconductor test handler supplier to a major North American semiconductor company. Its test handler products are patented, setting back would-be competitors by 2-3 years.
With the experience gained in supplying this major customer, AEM is well-equipped to provide automation tools for other manufacturing companies. The company also believes that it is on track for multi-year growth with this customer.

YTD, AEM’s share price has gained 278%, reaching a high of S$2.77 on 5 Jun 2017. The share price corrected to a low of S$2.07 on 28 June, mirroring the tech stock sell-off on the NASDAQ.
We believe its share price has yet to peak as:
1. AEM is trading at 6.4x/5.8x FY18F/19F P/E versus 19%/11% core EPS growth, and
2. AEM is on track to deliver 311% core EPS growth in FY17F, based on our estimates.

In its 1Q17 results announcement, AEM guided for 9M17F revenue of S$142m and pretax profit of S$17.5m. Based on our analysis of its profit guidance, AEM is on track to deliver 300%/136% yoy growth in net profit for 2Q17F/3Q17F.
We note that sales orders received that can be recognised as revenue in FY17F have risen from S$130m (3 Mar 2017) to S$152m (18 Apr 2017) and subsequently, to S$182m in a 5 Jun 2017 announcement.

AEM already has an established management in place and its business with its key customer has taken off firmly.
On 5 Jun 2017, major shareholder Orion Phoenix placed out 2.7m shares at S$2.70 to various long-only institutional funds, reducing its stake to 23.96%. Orion Phoenix will need to exit its investment in AEM within the next five years as the fund goes end-of-life. These factors make it conducive for any potential M&A talks with interested third parties.

In its 2016 annual report, AEM Chairman wrote that “with clear visibility of growth into the next few years, we intend to adopt a dividend policy to pay annual dividends, including interim dividends, of not less than 25% of profit after tax excluding non-recurring, one-off and exceptional items".
AEM has also indicated its confidence in its current business with the major customer with a 1-for-2 bonus issue (completed).
Based on the 25% payout guidance, we estimate decent dividend yields of 3.3-4.4% over FY17-19F.

Our calls to management revealed no fundamental issues. As such, we maintain our Add call and target price of S$3.39 based on 10x FY18F P/E (at 15% discount to its major customer's P/E and 2% discount to peer average P/E).
Order pushback by its key customer is a downside risk to our call.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-07-04

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