AEM Holdings Ltd - CGS-CIMB Research 2018-10-31: HOLD For The Next Earnings Upturn


AEM Holdings Ltd - HOLD For The Next Earnings Upturn

  • AEM's 9M18 pre-tax profit in line with company as well as our expectations.
  • AEM expects a slowdown in FY19 but long-term plans remain on track.
  • We upgrade AEM from Reduce to HOLD as FY19 slowdown has been priced in.

AEM on track to meet its FY18 guidance

  • AEM is on track to meet its FY18 guidance. As at 9M18, AEM has achieved 88%/84% of its FY18 revenue/pre-tax profit guidance. We deem the 9M core net profit at 78% of our full-year expectation to be in line.
  • In 3Q18, AEM incurred S$0.6m in expenses associated with a restructuring exercise and also reported an exchange loss of S$1.4m.
  • No interim dividend was declared versus 3.0 Scts DPS in 3Q17.

Heading into a 2019 slowdown

  • AEM expects a moderation in demand for its Test Handler (TH) after FY18. The company has been manufacturing its TH in high volume since late FY16. The company expects new equipment sales to be a function of
    1. the timing and pace of customer’s decision to replace legacy TH platforms,
    2. sales seasonality effect, and
    3. market share gains by its major customer.
  • AEM expects sales of its THs to be at a lower level in FY19 compared to FY18.

Well-positioned with a strong balance sheet

  • As at end Sep-18, AEM’s net cash position was S$42.3m (debt was a mere S$243,000). Management remains alert on monitoring its cost structure and will strive to proactively manage its fixed costs in line with any volatility in its business.
  • In 3Q18, achieving a better staff and talent mix led to an S$0.6m in one-off restructuring expenses.

Hold for the next earnings cycle

  • Our FY19-20F EPS forecasts are raised as we lower operating expenses given the commitment to manage the costs in line with business volatility.
  • We upgrade to HOLD based on an unchanged 10x (5% discount to its major customer’s P/E multiple) FY19 core EPS.
  • Catalysts are stronger than expected orders from its major customer and sizeable order wins in its business with Huawei.
  • Downside risk is worse than expected order slowdown and slow pace of progress in its business with other customers.

William TNG CFA CGS-CIMB Research | https://research.itradecimb.com/ 2018-10-31
SGX Stock Analyst Report HOLD UPGRADE REDUCE 0.75 UP 0.690