AEM Holdings - Maybank Kim Eng 2019-02-26: FY19 Sales Guidance A Relief, But Expect Volatility


AEM Holdings - FY19 Sales Guidance A Relief, But Expect Volatility

Positive sales guidance; Maintain BUY

  • Amid an expected slowdown of HDMT test handlers (TH) sales, AEM HOLDINGS LTD (SGX:AWX)’s 4Q18 PATMI fell 55% y-o-y on the back of a 33% drop in revenue. Still, FY18 PATMI of SGD33.5m (+6.4%) met our expectation (Consensus N.M.).
  • We raise FY19 EPS by 8% and leave FY20 unchanged after factoring in AEM’s FY19 sales guidance that exceeded our expectation. ROE-g/COE-g Target Price is raised by 2% to SGD1.24, now based on 2.8x average FY19-20E P/B, from 2.9x previously.
  • Stronger-than-expected order wins are a key catalyst.

Slowing HDMT handlers sales anticipated

  • Management had already flagged the slowdown in HDMT TH sales in prior quarters.
  • For FY19E, AEM continues to expect a lower level of HDMT TH sales compared to FY18. We still see a potential recovery of HDMT TH sales in FY20E due to:
    1. completion of capacity expansion for a key customer in Israel; and
    2. launch of new chips and/or chip platforms.

Still on the conservative side of revenue guidance

  • Our updated revenue forecast of SGD193m is on the conservative end of the guidance range of SGD180-210m to factor in risks like order delays/cancellations.
  • Upside potential to our estimate could arise from further evidence of continued strong order wins (SGD140m of order wins YTD to be largely delivered within 9M19 vs. SGD115m as at Jan-18.

Building the runway for FY20E

  • The first solutions for Huawei (Inspirain customer) and the memory customer (AMPS solution) will be delivered in 2019. In 2020, AEM continues to expect production ramp ups for its key customer (USD235b market cap chipmaker), Huawei and the memory customer.
  • We remain positive on the shares and reiterate BUY with 18% upside to our Target Price over the next 12 months.
  • Going forward, as management has tipped that quarterly earnings could be lumpy, we expect share price volatility. Any resultant AEM's share price weakness would provide an even more attractive entry point, assuming other material factors are unchanged.

Earnings Revisions

  • We raise EPS for FY19 by 8%, and left FY20 largely unchanged, after factoring in:
    1. AEM’s FY19E revenue guidance of SGD180-210m, which is above our previous estimate of SGD163m; and
    2. lowered gross material margins (gross margin ex-direct staff costs), to reflect management’s expectations that sales mix in FY19 will still be roughly equally split between lower-margin equipment and higher-margin consumables.
  • Our revised ROE-g/COE-g Target Price of SGD1.24 is based on 2.8x average FY19-20E P/B, in turn based on FY19-20E average ROE of 26.4%, COE of 10.6% and LTG of 2%. We have used the average of FY19-20E to arrive at our Target Price as we believe this will capture the expected earnings recovery in FY20E.
  • We believe stronger-than-expected orders present upside potential to our earnings estimates, as we have not factored in the contributions of Huawei and the hybrid solutions project that AEM is ramping up production for its key customer in 2020. Conversely, we see downside risks to earnings from limited FY20E visibility.
  • Final FY18 DPS of SGD1.9cts was announced, bringing full-year DPS to SGD3.4cts (+13% y-o-y). However, as AEM has a 25% pay-out ratio policy, FY19E dividends might fall.

Lai Gene Lih CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-02-26
SGX Stock Analyst Report BUY MAINTAIN BUY 1.24 UP 1.210