AEM Holdings - CGS-CIMB Research 2020-02-26: Fundamentals Support Higher Valuation


AEM Holdings - Fundamentals Support Higher Valuation

  • AEM Holdings' FY19 net profit was 18% above our/consensus expectations.
  • It was a blow-away quarter, with 4Q19 revenue/net profit up 125%/281%, respectively.
  • Reiterate ADD, with a higher Target Price of S$2.71, as we factor in AEM’s revised upwards revenue guidance for FY20.

Record FY19

  • AEM Holdings (SGX:AWX)’s FY19 revenue of S$323.1m was 2.5% above the high-end of its revenue guidance of S$315m. Gross material margin hit a record 49.4% in 4Q19, driven by cost savings and higher contribution from its better-margin legacy Test Handlers (THs).
  • For the full year, gross material margin was also at a record 40.5% — the significant margin expansion led to AEM’s FY19 earnings outperforming our/consensus expectations by 18%.
  • A final DPS of 3.1 Scts was declared. Together with an interim DPS of 2.0 Scts, the full-year DPS of 5.1 Scts is in line with the company’s 25% dividend payout policy.

FY20 outlook

  • AEM has once again raised its FY20 guidance. Its new guidance for sales orders received to be delivered to customers in FY20 is S$338m (vs. the previous guidance of S$245m). Its FY20 revenue guidance is raised to between S$360m and S$380m (vs. S$330-350m previously).
  • The key risk to watch out for is the impact of the coronavirus outbreak on the overall economic outlook and possible disruptions to the supply chain.

Getting more confident on FY20-21F

  • The official guidance from AEM, which is based on purchase orders received from its customers, instils greater confidence in our FY20-21F forecasts. We now assume higher revenue for FY20-21F and expect FY19’s gross material margin to be sustainable into our forecast period. This leads to a 9-22% increase in our FY20-21F net profit forecasts.
  • We also introduce our FY22F forecasts.

Higher revenue expectations drive our higher TP

  • Our higher earnings expectations drive further improvements in our ROE estimates over FY20-21F. This, in turn, leads us to a higher ROE-g/COE-g-derived P/BV multiple of 4.05x (previously 3.88x). On a FY20 BV/share of S$0.67, our Target Price is raised from S$2.38 to S$2.71.
  • Potential re-rating catalysts include:
    • further order wins from its major customer (we understand that AEM is involved in new programmes with its key customer),
    • new revenue stream potential with a solid state memory customer, and
    • further M&As given its net cash (zero debt) war chest of S$108m as at end Dec-2019.
  • See AEM Holdings Share Price; AEM Holdings Target Price; AEM Holdings Analyst Reports; AEM Holdings Dividend History; AEM Holdings Announcements; AEM Holdings Latest News.
  • Key downside risks are order pullbacks or a slowdown in orders from its major customers, and operational distruption if the coronavirus outbreak worsens.

William TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-02-26
SGX Stock Analyst Report ADD MAINTAIN ADD 2.71 UP 2.380