AEM Holdings Ltd - CIMB Research 2017-11-03: It Ain’t Over

AEM Holdings Ltd - CIMB Research 2017-11-03: It Ain’t Over AEM HOLDINGS LTD AWX.SI

AEM Holdings Ltd - It Ain’t Over

  • We deem AEM’s 3Q17 net profit at 36%/83% of our 3Q17/9M17 forecast in line.
  • The earnings outlook remains strong, with its key customer’s requirements still not fully met and room for AEM to further improve its cost structure.
  • We leave our forecasts unchanged and maintain our TP at S$4.55 (unchanged 10x FY19F). Maintain Add.

3Q17 – strong growth as expected

  • We deem AEM’s 3Q17 net profit at 36%/83% of our forecasts in line with our expectations.
  • 3Q17 revenue grew 173% yoy, while net profit grew 321% yoy.
  • Its equipment business contributed to about 46% of revenue while the kits, spares and services revenue contributed to around 51% of revenue.
  • Gross material margin improved to 38.3% for 3Q17 versus 36.1% in 3Q16. 9M17 gross material margin was 31.0%.
  • A pleasant surprise was the proposed S$0.03 DPS.

Outlook still positive

  • AEM maintained its positive outlook for the coming years as its key customer continues to make the transition to their new testing platform. We are encouraged by AEM’s involvement via engineering services requested by its customer.
  • We also understand that AEM will be opening an Application Development Centre at its key customer’s site. Such close proximity to its customer will certainly help in the higher margin kit (consumable) portion of AEM’s business.

Room to improve margins

  • Our gross material margin assumptions over FY17F/18F/19F are 27.2%/28.2%/28.7%. This appears conservative against AEM’s 3Q17/9M17 gross material margins of 38.3%/31.0%.
  • We could be under-forecasting AEM’s gross material margins as the lower-cost Penang facility starts mass production in FY18 and AEM devotes more resources to lower its bill of materials.

Moving away from quarterly guidance

  • As its business with its key customer matures, we believe AEM will not need to provide quarterly guidance but could look towards a half-year or full-year revenue and profit guidance.

Maintain Add

  • We leave our forecasts unchanged and maintain Add with a S$4.55 target price based on an unchanged 10x FY19F earnings.
  • Downside risk is order cancellation/delay by its major customer, while upside risks come from unanticipated strength in customer demand and margin expansion.
  • We believe it is also an opportune time for the Board to consider a share split to further improve trading liquidity and increase its share base, which is a rather smallish 65.0m shares currently.

William TNG CFA CIMB Research | 2017-11-03
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 4.550 Same 4.550