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

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%.

Leading test handler supplier 

  • 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.

Has the share price peaked? 

  • 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.

Share price driver #1: Potential FY17 earnings surprise 

  • 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.

Share price driver #2: Potential M&As 

  • 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.

Share price driver #3: Dividends 

  • 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.

No fundamental reason for sell-down; Maintain Add 

  • 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 | 2017-07-04
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 3.390 Same 3.390