AEM Holdings Ltd - CGS-CIMB Research 2019-08-09: Better-Than-Expected 2Q

AEM HOLDINGS LTD (SGX:AWX)

AEM Holdings Ltd - Better-Than-Expected 2Q

AEM HOLDINGS LTD (SGX:AWX)'s 2Q19 core net profit of S$15.7m was 62% above our expectation of S$9.7m.
The outperformance was due to strong orders from its key customer.
Maintain ADD with unchanged Target Price of S$1.23.

We had earlier flagged that we were expecting a minimum net profit of S$9.7m for 2Q19F. AEM’s 2Q19 net profit of S$15.7m beat our expectation by 62%.
The beat came from the strong 35% y-o-y growth in revenue as AEM’s major customer ordered more test handlers in anticipation of its own product launch roadmap. AEM benefitted given its sole source supplier status.
As 1H19 core net profit accounted for 79% of our previous full-year forecast, we raise our FY19F core net profit by 26.8%. Our FY20-21F EPS are tweaked as we fine-tune our expenses assumptions.

On 25 Jul 2019, AEM raised its guidance for orders to be delivered in FY19 to S$255m, from S$209m in Apr 2019. FY19 revenue guidance was also raised to a range of S$265m-280m from S$225m-250m previously.
On its diversification efforts, AEM has delivered a few asynchronous modular parallel smart (AMPS) systems to a memory manufacturer. Its micro-electro mechanical system (MEMS) testing solutions division (Afore) has also received an equipment order for its wafer-level environmental sensor test solutions from a major German sensor supplier in the automotive and consumer industries.

Our Target Price remains at S$1.23, still based on 2020F P/E of 10x (13% discount to sector average; previously in line with sector average previously). We maintain our ADD call.
Potential re-rating catalysts include further order wins from its major customer, and new customer wins for AEM’s own handler platform and test solutions for optical fibre cables.
Order pullbacks/slowdown from its major customer remains the key risk to our ADD call.
As AEM's business remains very much order driven, some caution may be warranted on FY20 earnings expectations as its major customer may have front-loaded some of its requirements into FY19. Stronger-than-expected orders from its major customer is an upside risk to our earnings forecasts.

William TNG CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-08-09

SGX Stock Analyst Report ADD MAINTAIN ADD 1.230 SAME 1.230