AEM Holdings - DBS Research 2021-03-02: To New All-Time Highs


AEM Holdings - To New All-Time Highs

  • AEM's FY20 net profit surges 85% y-o-y to S$97.6m.
  • Strong momentum in the industry and for AEM.
  • AEM's share price trading at a 51% discount to its peer average of 21.0x.

AEM's FY20 Results Review

AEM's FY20 net profit increased 85.0% y-o-y to S$97.6m, in line with our estimates.

  • AEM (SGX:AWX)’s 2H20 net profit increased 38.9% y-o-y to S$42.3m. The increase in FY20 net profit was mainly driven by growth in the Equipment Systems Solutions (ESS) segment on higher orders. Meanwhile, FY20 net profit margin increased 2.5ppts to 18.8%, from 16.3% in FY19, largely due to an increase in operating leverage. See AEM's announcements.
  • AEM's FY20 revenue increased 60.6% y-o-y to S$519.0m, driven by its key customer. 2H20 revenue increased 42.2% y-o-y to S$245.3m. The increase in FY20 revenue was primarily driven by growth in its ESS segment, which increased 62.8% y-o-y to S$501.3m. Revenue from its ESS segment accounted for 96.6% of its full-year revenue. We believe that almost the entirety of its revenue from this segment continues to come from its key customer, Intel.
  • Proposing final dividend of S$0.04 per share, up from S$0.031 per share in FY19. This brings AEM's FY20 full-year dividend to S$0.09 per share, up from S$0.051 per share in FY19. This represents a dividend payout ratio of 25.4% in FY20. See AEM's dividend history.

AEM will abstain from providing financial guidance for FY21F until the close of its offer for CEI Limited.

  • CEI Limited (SGX:AVV)’s shareholders are expected to receive the Offer Document between 14-21 days from 15 February (announcement date). The offer will remain open for acceptance by CEI’s shareholders for at least 28 days from the date of posting of the Offer Document. We believe the offer should conclude by end-March at the earliest.

Our Thoughts, Earnings, and Recommendation

Momentum in the industry continues to remain strong.

  • The 3-month US Semiconductor Equipment Billings which we track closely, indicates that the momentum in the industry continues to be strong. The y-o-y % change in the billings data reversed and turned positive in October 2019 and January 2021 marks its 16th consecutive y-o-y increase. The billings increased 29.9% y-o-y to US$3.0bn in January 2021.

Strong surge in demand for chips due to COVID-19 has led to a chip shortage.

  • Recent news headlines have reported global chip shortages due to demand for chips rebounding strongly, far outstripping planned supply. The semiconductor industry was already primed for a structural uptrend with the new wave of technological advancements (5G, IoT, AI, EVs, autonomous driving, etc.) sweeping in. COVID-19 further accelerated the demand for chips with other structural trends of its own such as increased telecommuting.
  • For instance, remote working and studying have spurred the demand for better electronics at home on the consumer end. Intel, which currently owns about 80% of the CPU chips in the PC market, reported a 33% y-o-y increase in PC sales. Enterprises that provide cloud solutions and telecommunication platforms have also had to increase spending to upgrade their infrastructure to cater to the surge in user traffic due to increased telecommuting.

We view the global semiconductor chip shortage as more of a positive development.

  • Qualcomm’s incoming CEO has said that orders for chips that run computers, cars, and many other internet-connected devices are swamping the industry and he expects supplies to improve in 2H21. We believe that the temporary shortage is a signal to fabs and foundries to increase their spending on their semiconductor manufacturing and testing equipment, and this should be positive for AEM.

AEM's FY21F/22F earnings forecast raised by 8%/22%

  • Revise AEM's FY21F/22F earnings by 8%/22% on the continued strong momentum in the industry and the inclusion of CEI’s acquisition. We continue to remain positive on AEM and lift our FY21F/22F earnings as we mainly raise our revenue estimates. The strong data points and news developments in the industry provides us with confidence to raise our earnings estimates for AEM. The larger increase in FY22F is mainly due to the full-year contribution from CEI as compared to one quarter’s worth of contribution in FY21F.
  • We estimate that CEI will contribute S$1.6m in earnings to AEM’s FY21F earnings (assume completion in end-3Q21). We have also projected and included CEI’s results into our FY21/22F forecasts. In our consolidation, we have assumed that all shareholders of CEI tender their shares, and elect the 85/15 Cash/Shares option and 70/30 Cash/Shares option at a ratio of 50-50. In this case, 5.4m new shares will be issued, representing 2.0% of AEM’s outstanding shares in FY20.
  • We have also assumed that the acquisition will be completed by end-3Q21. We have projected FY21-23F earnings of S$6-7m for CEI and we estimate its contribution to be S$1.6m to AEM in FY21F.

Maintain BUY on AEM with a higher target price.

See also the recent SGX Market Update: SGX’s 5 Most Traded Technology Stocks Complete FY20 Reporting.

Wei Le CHUNG DBS Group Research | Lee Keng LING DBS Research | https://www.dbsvickers.com/ 2021-03-02
SGX Stock Analyst Report BUY MAINTAIN BUY 5.36 UP 5.160