AEM HOLDINGS LTD
AWX.SI
AEM Holdings Ltd - FY17 Is Just A Beginning
- Management remains confident of a multi-year ramp-up of its business with its key customer.
- Patent protection and first-mover advantage are effective entry barriers.
- Major shareholder remains committed to a gradual exit (fund goes end of life in 2021).
Consumable demand is real
- We attended AEM’s 2Q17 results briefing held on 17 Aug 2017.
- We understand that in 2Q17, AEM’s catch-up orders for consumables (pans and kits) were in the S$10m range. This arose as some equipment – Test Handler (TH) – ordered by its customer excluded such consumables. However, we note that of this amount, some were indeed re-orders for consumables. As such, AEM is starting to get some consumable re-orders.
Plenty of runway to improve profitability
- We opine that AEM still has leeway to improve profitability.
- Measures to further improve profitability include:
- substituting the materials used in the production of TH with less costly materials or suppliers with similar quality;
- improving production efficiency as half a year of commercial production ramp-up has passed; and
- using lower-cost Penang plant when it is fully operational by end-4Q17.
We deem FY17 earnings guidance cautious
- While FY17 revenue/PBT guidance of S$200m/24m implies a half-on-half decline in 2H17, we deem the guidance cautious as AEM has outperformed its guidance since the company first started issuing them.
- Our view remains that AEM is just in the first year of a replacement cycle, driven by demand from its customer.
- We like the prudence AEM is demonstrating by asking its customer to moderate its demand and the cautious capacity expansion at its end.
Room to grow
- Growth opportunities for AEM with its existing customer include the latter’s other business segments.
- AEM could also explore opportunities to supply other types of equipment for its key customer.
- The company is also considering small acquisitions. These could be for testers that AEM could integrate with its TH or suppliers of materials/modules that AEM needs to product the TH.
Gradual exit by major shareholder
- Major shareholder Orion Phoenix remains committed to a gradual sell down of its stake in AEM (Orion is essentially a private equity fund with an end of life by 2021).
- In the meantime, the company remains committed to building up AEM. New engineering resources have been hired to work on non-semiconductor growth opportunities.
- We think that an alternative exit plan that Orion Phoenix could consider is the appointment of a strategic adviser for a trade sale.
- Maintain Add and target price (S$3.43), based on 10x FY18F EPS.
- Re-rating catalyst is stronger-than-expected orders and key risk is single customer dependency.
William TNG CFA
CIMB Research
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http://research.itradecimb.com/
2017-08-17
CIMB Research
SGX Stock
Analyst Report
3.430
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