AEM Holdings - Maybank Kim Eng 2020-03-29: Guidance Maintained

AEM HOLDINGS LTD (SGX:AWX)

AEM Holdings - Guidance Maintained

AEM Holdings (SGX:AWX) has the strongest FY20E earnings visibility within our Singapore tech coverage.
Despite AEM’s Penang factory being closed through the movement control order in Malaysia from 18-Mar to 14-Apr, full year sales guidance of SGD360-380m is unchanged. As demand drivers appear intact, we believe a key earnings risk is if global supply chain disruptions result in any unforeseen components shortages.

Maintain BUY and ROE- g/COE-g Target Price of SGD2.82 (3x blended FY20-21E P/B).

On 19-Mar, AEM announced that its sales guidance of SGD360-380m for FY20 is unchanged. Further, AEM introduced 1Q20 sales guidance of a record SGD135-145m, and is cautiously confident that 1H20 will be an all-time high despite some shifts in the delivery of its sales orders due to the Covid-19 situation.
On 20-Mar, key customer Intel highlighted that it is delivering more than 90% of its chips on time. This is consistent with Intel’s early March message that operations are “relatively normal”.

AEM’s balance sheet is robust with net cash to equity of 80%. Strong cash generation is driven by high profitability and working capital efficiency. Since 2017 (ramp-up of HDMT test handlers), cash conversion cycle has been around 15 days or less.
Intel has also kept a tight range for its days of payables outstanding (~40-50 days), even throughout the GFC, suggesting it is a good paymaster.

While we caution further volatility in the share price, we believe this may present buying opportunities. AEM is currently trading at 2.5x FY20E P/B, around 0.5 SD below its 3-year mean of 3x.
See AEM Holdings Share Price; AEM Holdings Target Price; AEM Holdings Analyst Reports; AEM Holdings Dividend History; AEM Holdings Announcements; AEM Holdings Latest News.
We continue to see AEM as a potential M&A play given its first-mover advantage in system level test. In that regard, we find is 4x FY20E EV/EBITDA valuation highly attractive. See attached PDF report for sensitivity analysis details. For comparison, Cohu acquired Xcerra for 7-8x forward EV/EBITDA.