AEM Holdings Ltd - CIMB Research 2018-04-25: Awaiting The Next Catalyst

AEM HOLDINGS LTD AWX.SI

AEM Holdings Ltd - Awaiting The Next Catalyst

We deem AEM's 1Q18 core net profit, at 18% of our full-year forecast, to be below expectations.
AEM maintained its guidance: FY18 revenue will be at least S$255m and PBT will be at least S$42.0m.
We now have a better appreciation of its higher staff costs arising from its recent acquisitions and spending to launch new products.
AEM will continue to seek meaningful acquisitions given its strong cash balance.

We maintain our ADD call with a lower Target Price of S$7.24 on higher staff cost assumptions.

We deem 1Q18 results to be below expectation.
We attribute this to the higher expenses arising from its three recent acquisitions which we were not able to forecast. 1Q18 revenue rose 55.9% y-o-y with the key Equipment Systems segment growing 58.5% y-o-y.
Gross material margin for the quarter was 34.3%, down from 37.4% in 4Q17 but still an improvement from the 28.3% in 1Q17. The decline in margin was due to a one-off discount given to its customer as well as product mix.

AEM reiterated its guidance for revenue and pre-tax profit of at least S$255m and S$42m, respectively, for FY18. Sales orders received for delivery in FY18 remained at S$192m, an increase of S$77m over its previous guidance on 1 Feb 2018.
Management expects seasonality in its sales, with peak quarters in the second and third quarters. Due to shorter order lead times, visibility for the fourth quarter is limited.

Integrating the technical expertise AEM has learnt over the years with its recent acquisitions, AEM will launch its own test handler known as AMPS (Asynchronous Modular Parallel Smart) platform. This will be a test handler that can support different testers and will be a scalable solution. AEM will provide this on a customised basis to third-party testing companies or companies that provide testers.
AEM hopes to be able to announce some wins by either 2H18 or FY19.

Management commented that the initial production ramp-up phase of its current test handlers for its major customer will transition more to an operational replacement of its customer’s older fleet over many years. It expects the higher-margin field services and consumables parts of the business to start to grow in late FY18.
The company has also started work on next-generation solutions for its customer.
Key risks are order pullback/cancellation by its major customer.

We adjust upwards our other operating expenses forecasts for FY18F to reflect the M&A- related professional fees of S$0.5m incurred in 1Q18. At the same time, we now believe staff costs in FY18F will be higher than what we forecasted previously as AEM is looking to hire more senior engineering talent as well as expenses to develop next-generation solutions for its customers and its own AMPS platform.

Our FY18-20 EPS forecasts are reduced by 6.9-15.9% as we factor in higher staff costs.
On an unchanged 10x CY19F (17% discount to sector average) earnings, our Target Price is lowered to S$7.24.
Potential re-rating catalysts are unexpected increase in orders from customers.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2018-04-25

SGX Stock Analyst Report ADD Maintain ADD 7.24 Down 8.190