AEM Holdings Ltd - CIMB Research 2018-03-01: Multiple Growth Drivers

AEM HOLDINGS LTD AWX.SI

AEM Holdings Ltd - Multiple Growth Drivers

FY17 net profit was 6% above our forecast.
AEM declared a final DPS of 6.5 Scts and proposed a 3-for-1 bonus issue.
FY18 guidance of S$255m for revenue and S$42m for pre-tax profit is maintained. We see room for AEM to up its guidance as the year progresses.
Based on our higher FY19F estimates (as we introduce consumable revenue), our new Target Price is S$8.19 based on an unchanged 10x CY19F earnings.

FY17 net profit was 6% above our forecast. AEM’s pre-tax profit of S$36.8m was in line with its guidance of a pre-tax profit of S$35m-37m for FY17. Revenue growth was driven by higher deliveries of its Test Handler (TH) and kits, spares and services.
Gross material margin decreased from 37.7% in FY16 to 33.0% in FY17 as AEM sold more Test Handlers (Test Handlers have a higher material content).
A final DPS of 6.5 Scts was declared, and topping off FY17 was a proposed 3-for-1 bonus issue.

In FY17, AEM generated an operating cash flow of S$39.8m before working capital changes. With better working capital management, net cash from operations swelled to S$49.8m.
PPE capex in FY17 was a negligible S$310,000 given its asset-light business model. Free cash flow was S$39.5m and its asset light business model provides AEM the confidence to issue a 25% minimum payout policy on 23 Feb 2017.
FY17 net profit of S$31.5m translated to S$39.5m of free cash flow.

We believe AEM is making good progress with its key customer. AEM is now able to meet its customer’s requirement of a 5-month lead time to deliver a TH (last year AEM needed at least 6 months). AEM is also able to support its customer on a 24/7 basis worldwide.
We also note that its customer has committed to finish building a new fab in North America and could possibly be expanding capacity in Israel too. These developments will drive more demand for AEM’s Test Handlers.

AEM also made three acquisitions over the past 6 months.
- The Afore acquisition was completed on 1 Mar 2018.
- On 22 Feb, AEM announced the acquisition of IRIS Solution which supplies vision inspection solutions that are integrated into AEM’s Test Handler. IRIS achieved an unaudited pre-tax profit of S$0.5m in FY17. We expect AEM’s gross material margin to improve by at least 1% pt in FY17 as vision solutions from IRIS accounted for an estimated 10% of AEM’s cost of materials.

AEM’s Penang plant for its Test Handler product should contribute fully in 2H18. We believe AEM’s new theoretical production capacity could increase to 80 units vs. an estimated 60 units in FY17.
We believe the higher capacity also hints at a larger total addressable market (TAM) and we note that AEM is now supplying its Test Handlers to other business segments (modem chips, computing processor chips) of its customer.

We now assume a TAM of 250 units versus 180 units previously. At the same time, we also factor consumable contributions into our FY19-20F estimates. These lead to an 8.4- 23.8% upward revision in our FY18-19F earnings forecasts.
On an unchanged 10x CY19F (11% discount to sector average) earnings, our new higher Target Price is S$8.19.
Downside risks to our call are order cancellations/delays.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2018-03-01

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