AEM Holdings Ltd - CIMB Research 2017-08-17: FY17 Is Just A Beginning

AEM Holdings Ltd - CIMB Research 2017-08-17: FY17 Is Just A Beginning 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:
    1. substituting the materials used in the production of TH with less costly materials or suppliers with similar quality;
    2. improving production efficiency as half a year of commercial production ramp-up has passed; and
    3. 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 | http://research.itradecimb.com/ 2017-08-17
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 3.430 Same 3.430