AEM Holdings Ltd - CGS-CIMB Research 2018-07-31: Poor Visibility For 2019

AEM HOLDINGS LTD SGX:AWX

AEM Holdings Ltd - Poor Visibility For 2019

2Q18 net profit was in line with expectations at 25% of our full-year forecast. 1H18 formed 47% of our full-year forecast.
AEM has maintained its guidance for FY18. It expects its revenue/PBT to be at least S$255m/S$42m.
AEM has also guided for headwinds and significant volatility in earnings for FY19. As such we slash our FY19-20F EPS forecasts by 61-64%.
Interim DPS of 1.5Scts was declared. Net cash per share at end Jun-18 was S$0.17.
We downgrade our rating from Add to REDUCE. Our Target Price is cut to S$0.69, still based on 10x FY19F EPS.

We deem the 2Q18 results in line, with net profit at 25% of our full-year forecast. This was driven by a 17.8% y-o-y increase in revenue in the equipment systems business.
One-off items in the 2Q18 results were minor. However, the effective tax rate of 17.6% was higher than we expected.
1H18 net profit formed 47% of our full-year forecast. An interim DPS of 1.5Scts was declared.

AEM announced that the group has to-date received sales orders worth S$235m for delivery in FY18. FY18 guidance of revenue of at least S$255m and PBT of at least S$42m was unchanged.
AEM’s guidance implies that 2H18 PBT could fall 4.9% hoh and 8.2% y-o-y. Sales seasonality with peak quarters in 2Q and 3Q was also reiterated.

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AEM expects that the initial ramp-up phase of its equipment at its customer sites to be completed by end-FY18. Going into FY19, AEM expects a rolling upgrade phase which could introduce significant volatility into its business.
AEM said visibility into 2019 remains dim, though the company will continue to work on its consumables business and is also working on several new product initiatives.

De-rating catalysts include order pullback and cancellation by customer. Upside risks include consumable revenue gaining traction as the current equipment ramp-up phase at its customer ends.
Management has also guided that it will strive to proactively manage its fixed costs in line with the volatility in its business.

Given the poor earnings visibility, we slash our FY19-20F EPS forecasts by 61-64% (see page 2 for further details). With our valuation still based on an unchanged 10x P/E multiple (22% discount to peers) to our FY19F, our target price falls to S$0.69.
Downgrade to Reduce from Add.

AEM maintained its FY18 guidance of revenue of at least S$255m and pre-tax profit of at least S$42m.
AEM also commented that the initial ramp-up phase of its equipment at its customer’s sites will be completed by the end of Dec 2018 following which AEM expects a rolling upgrade phase which could introduce significant volatility in its business. Management commented that “visibility into 2019 remains dim”.
As such, we believe that AEM’s earnings will peak in FY18 and decline y-o-y in FY19.

Our current thesis that its major customer will replace its legacy generations of Test Handler (TH) with AEM’s new TH remains intact. However, given that the ramp-up phase in demand from its customers is likely over, the timing and occurrence of such replacements are less clear.
Taking management’s latest guidance into consideration, we have reduced our unit sold assumptions in FY19-20F.
Management also commented that AEM continues to work on its consumables business. Currently, there are no significant data points on re- ordering of consumables. At the company’s 26 Apr Annual General Meeting for shareholders, management indicated that it is working on the consumables business for FY19. As such, we retain our assumption that there will be some consumable revenue contribution in FY19-20F. However, such revenue will be reduced given that our installed base would be lower than previously forecasted.
We also retain our current assumption that gross material margin will continue to improve in FY19-20F as vertical integration and insourcing of certain components kicks in.
We leave our current tax rate assumption of 17% intact but note that AEM is applying for Pioneer Tax Status for its Penang plant. AEM might be able to get an update on its application from the Malaysian authorities in 2H18.

We retain our valuation parameter of 10x FY19F earnings. This represents a 22% discount to AEM’s peer average.
Our Target Price is lowered to S$0.69.
As at end-Jun 18, net cash per share was S$0.17 and book value per share was S$0.29.

William TNG CFA CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-31

SGX Stock Analyst Report REDUCE Downgrade ADD 0.69 Down 1.720