AEM Holdings Ltd - CIMB Research 2018-02-01: Stars Are Aligned

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AEM HOLDINGS LTD AWX.SI Afore

AEM Holdings Ltd - Stars Are Aligned

• AEM announced the acquisition of Afore, a profitable leading MEMS test solution company.
• Accretive acquisition as cash forms two-thirds of the acquisition payment and new shares to be issued is just 1.3% of AEM’s share base.
• Given Afore’s small earnings base and integration synergies with AEM, we believe Afore could register 20% profit growth in FY18-19F.
• Announced the retirement of its current CEO and appointment of new CEO.
• We revise our earnings forecasts further and incorporate the acquisition impact, leading to a higher Target Price of S$6.62, still based on 10x CY19F earnings.

Game-changing acquisition - Afore acquisition brings exciting opportunities - 

All about MEMS 

• AEM has signed an agreement to purchase a 100% stake in Afore Oy, a leading micro-electro-mechanical systems (MEMS) test solutions provider based in Finland, for EUR7.6m (approximately S$12.3m).
• Afore was incorporated in 1998 and offers innovative MEMS solutions including wafer level probers and test handlers with multi-stimulus and multi-package options, as well as tri-temp testing. 
• Afore is a pioneer in wafer-level MEMS testing, enabling its customers to realise the full cost and speed efficiencies of advanced packaging. Afore’s solutions are used in MEMS development and manufacturing in the automotive, industrial, and consumer sectors in Europe, USA and Japan. Its key customer is a major automotive MEMS sensor supplier based in Japan. Afore is one of the top 5 global MEMS test solutions providers, and offers the world’s only wafer-level MEMS test solution.
• AEM has been guiding investors that it is actively seeking acquisitions that are synergistic to its core growth business of integrated circuit chips handling and automation solutions. Management believes Afore will provide AEM with high-performance test capabilities and solutions in MEMS, a strategic high-growth semiconductor end-market forecasted to reach US$22bn in 2021 (source: Yole Development). 
• AEM intends to leverage Afore’s capabilities to expand its product and customer portfolio in the semiconductor and industrials sectors. The combination of AEM and Afore should yield significant business synergies through the combination of Afore’s products and technology capabilities with AEM’s global sales, manufacturing and field support networks. The enlarged company should be well positioned to provide high-performance MEMS test solutions to large, advanced manufacturers worldwide.
• The unaudited net profit for Afore was EUR0.7m (S$1.2m) for FY17 and its unaudited net asset was EUR1.4m (S$2.3m). Historical FY17 acquisition P/E and P/BV multiples are 10.6x and 5.45x, respectively. Using the last 12 months’ revenue of S$8.8m provided in AEM’s presentation slides, historical FY17 ROE for Afore of 51.5% suggests that its business is a high-margin one.
• The acquisition consideration will be paid for with EUR5.0m (S$8.1m) cash and EUR2.6m (S$4.2m) in 867,555 new AEM shares. Vesa Henttonen is the founder and managing director of Afore and the shares allotted to him will be subjected to a 3-year moratorium from the completion date. During the 3-year moratorium period, only 1/3 of the shares may be sold every year. Other than Henttonen, the remaining vendors of Afore will be paid in cash.

Management team further strengthened 

Succession and a stronger team 

• Along with this acquisition, AEM also announced a few key management changes: 
  1. Mr Keith Hsiang-Wen Toh has been re-designated from Independent Director to Non-Executive Non-Independent Director of the company. Mr Toh will devote more time to assisting AEM with strategic projects including the integration of recently announced acquisitions.
  2. Mr Charles Cher will retire from his position as CEO and Director of AEM on 1 Apr 2018 but will remain as Senior Advisor of the Board of AEM till 31 Dec 2018. Charles has been the CEO for the past four years and his retirement is part of AEM’s succession plan for the company. Charles has a direct interest in approximately 1.0m AEM shares and 233,543 ESOS. To recap, Charles was persuaded out of retirement previously to help drive AEM’s business with its key customer.
  3. Mr Chok Yean Hung (54 years old) will be the new CEO from 1 Apr 2018. Mr Chok has been with AEM since 2012. Prior to assuming the CEO position, he was the company’s COO. Mr Chok has more than 27 years of management and technical experience in the semiconductor industry. He was a founding management team of Ellipsiz Test, EEMS Asia Pte Ltd and United Test and Assembly Center Pte Ltd (UTAC). In UTAC, Mr Chok was the Vice President of Test Operation from 1998 to 2004, managing memory IC and mix signal ICs test’s manufacturing, engineering and development. Mr Chok started his career as Product and Test Engineer in Texas Instruments (S) Pte Ltd in 1988 and eventually became a Product Engineering Manager. In 1998, he was elected as Senior Member of Technical Staff, of Texas Instruments. He was awarded the Ministerial Citation for Excellence in Test Development from Singapore, National Science and Technology Board (NSTB) in 1997. He jointly holds the patent on 'A Method in Testing Semiconductor Devices’ with Texas Instruments, Dallas memory designers.
  4. The senior management team will be strengthened with the promotion of Mr Goh Meng Kiang (joined AEM on 18 Mar 2013) to Vice President of Operations, Mr Soh Wai Kong (joined AEM on 1 Jun 2009) to Vice President of Finance, and the appointment of Mr Chua Tat Ming, an industry veteran as Vice President of Engineering. Mr Chua spent 18 years at Motorola Electronics (S) Pte Ltd and close to another 12 years at Hi-P International Ltd’s R&D division.

Guidance & current order momentum 

Outperformed guidance 

• AEM’s actual 1H17 results saw sales exceeding its guidance by 49.3% while PBT exceeded guidance by 124.6%. 9M17 PBT exceeded the company’s initial guidance by 49.7%.
• AEM continues to see strong order momentum from its key customer. We understand that the company’s guidance is based on actual purchase orders received from its customer. Given the strong order momentum so far, we believe there is room for its sales order and PBT guidance to be raised further into the year.
• AEM started receiving orders for 1H18 revenue recognition on 30 Nov 2017 – a figure of S$76m. On 21 Dec 2017, this figure rose to S$100m and further rose to S$115m on 1 Feb 2018. Orders received for 1H18 revenue recognition has increased 51.3% since 30 Nov 2017.

Key changes - Upping our forecasts again 

• We are making a few key changes in this note: 

Afore acquisition 

1. We are factoring in the impact from the Afore acquisition into our FY18-19F figures.
2. We increase the share base of AEM by 867,555 shares (per AEM announcement) due to new shares issued in relation to the acquisition. This brings AEM’s share base to 66.3m shares.
3. Afore’s FY17 net profit was S$1.2m and AEM expects to complete the acquisition by the end of Feb 2018. We assume Afore will have a profit growth potential of at least 20% in FY18-19F. Based on AEM’s presentation slides, the MEMS and sensor market could see a revenue CAGR of 11.2% over 2015-2021F. Being a smaller company with a 6% market share and having launched a new product launch in 2017, a minimum 20% profit growth rate over a small profit base from the potential synergies with AEM seems reasonable, in our view.
4. Note that we have not separately made any forecasts on Afore’s revenue as its full income statement is not available. As such, our FY18-19 forecasts will not incorporate revenue contribution from Afore for the moment. We will only attempt to factor in the potential profit contribution from Afore at the bottomline.
5. Assuming the acquisition is completed at end-Feb 2018, we factor in 10 months of profit contribution, or S$1.2m from Afore in FY18F. For FY19F, we assume Afore will contribute S$1.7m profit.

FY18-19 forecasts for AEM’s test handler business 

• The further increase in sales order for 1H18 revenue recognition to S$115m, coupled with the ongoing cost reduction on AEM’s production process and supply chain management, puts us at risk of still underestimating its FY18- 19 profitability. As such, we further adjust our FY18F/FY19F gross material margin assumptions from 30.0%/30.5% to 31.0%/32%.   

Target price raised 

• Given our higher FY19 profit forecast, out target price rises to S$6.62, still based on 10x CY19F earnings (18% discount to sector average P/E of 12.2x).

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2018-02-01

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