AEM Holdings - DBS Research 2021-08-14: Endorsement From Temasek


AEM Holdings - Endorsement From Temasek

  • AEM's 1H21 earnings declined 29.8% y-o-y, slightly below our expectations.
  • Endorsement from Temasek through a private placement.
  • AEM remains attractive at a 30.7% discount to peers amidst a strong industry momentum.
  • Maintain BUY with a higher target price of S$4.98.

AEM's 1H21 Results Review

  • AEM (SGX:AWX)'s 1H21 net profit of S$29.7m (-29.8% y-o-y) was slightly below our expectations; revenue declined 29.8% y-o-y to S$192.3m. While we were expecting a weak 1H21, net profit in 1H21 was weaker than expected, forming ~32% of our full-year FY21F earnings. The decline in revenue and net profit was due to an exceptional ramp-up from its key customer last year (1H20), especially for its Tools & Machines, in line with AEM’s new products launches last year. The 1H21 net profit margin normalised to 15.4% (- 4.8ppts y-o-y) due to exceptional economies of scale in 1H20 as well as the inclusion of CEI’s results, which have lower net profit margins of ~5%.
  • Proposed interim dividend of 2.6cents per share. This represents an unchanged payout ratio of ~25% but is 48% lower y-o-y than the 5.0cents per share in 1H20.

Acquisition synergies are going well.

  • AEM’s recent acquisition of ATECO and CEI Limited are already beginning to bear fruit. AEM has leveraged on ATECO’s network and is in engagement with two top global memory customers. It has also begun incorporating CEI’s capabilities into its offerings to Intel.

Key Corporate Developments

  • Key corporate developments announced last quarter are progressing well.
  • Next-generation handlers on track to start a high-volume ramp at customer sites in late-3Q21 and into FY22F.
  • Technology acquisitions and in-house R&D are bearing results with engineering engagements with 10 out of the top 20 semiconductor companies for a potential volume ramp in FY22F.
  • Ongoing integration with CEI’s business, with plans to realise synergies and expand the group’s capabilities.

Private Placement to Venezio Investments (Subsidiary of Temasek)

  • Private placement worth S$103.1m to Venezio Investments. AEM has also proposed the private placement of 26.8m of new ordinary shares at an issue price of S$3.8477 to Temasek. The subscription shares represent 9.5% of the total number of issued shares. The rationale for the proposed subscription is to finance AEM’s business expansion plans, including both organic and inorganic (M&A) growth opportunities.

Our Thoughts

  • Weak 1H21 was expected. Management had earlier mentioned that it will be launching the next generation of handlers in 2H21 and a high-volume ramp will commence from late-3Q21 into FY22F. Management remains confident of a strong uptake in 2H21 into FY22F and has maintained its revenue guidance of S$460-520m for FY21F.
  • Our take on why the weak 1H21 makes sense. Amidst the ongoing chip shortage and to prepare for sustained growth in the semiconductor industry, we believe that Intel has intentions to prioritise the purchase of front-end equipment. Intel has repeatedly been cited in news headlines on its spending to build chip fabrication plants. ASML’s strong orderbook and mention of Intel reaffirms this view. In this case, the weak 1H21 is likely due to a deferment of orders (to AEM) to 2H21.
  • Private placement to Temasek is most likely to be for strategic reasons rather than for cash. Based on our interpretation during the 1H21 earnings call, we believe that the reasons for the private placement with Temasek are more likely to be to leverage Temasek’s extensive network. While this results in a dilution and the issue price is at a discount to its last trade price, this a positive development for AEM in the longer run as Temasek is a strategic and long-term investor.
  • The semiconductor Industry momentum remains strong. Industry data points and developments continue to point towards a strong multi-year trend, away from the usual ~1-2-year cycle. The US 3-month semiconductor equipment billings, which we use as a gauge to measure the strength of the outlook of the semiconductor industry, increased 58.4% y-o-y in its latest data print in June 2021. This is the 21st consecutive y-o-y increase and we remain confident of the structural uptrend driven by 5G, IoT, EV, AI, and the exacerbation by the COVID-19 pandemic.

AEM - Earnings forecast and recommendation

  • Revise FY21F/22F earnings by -12/-5% on lower revenue from its key customer in 1H21. We are reducing our revenue growth assumption for FY21F/22F on weaker-than-expected revenue from its key customer. However, with the continued strong momentum in the semiconductor industry, we are expecting AEM’s earnings in FY22F, even excluding CEI’s contribution, to be higher than its record in FY21F.
  • Maintain BUY with a higher target price of S$4.98, from S$4.73 previously. We are raising our target price as we roll forward our P/E peg to FY22F earnings. Our target price of S$4.98 is pegged to 13.7x FY22F earnings, which is the same multiple as AEM’s previous peak valuation in 2018. This represents a 17% discount to its peer average of 16.5x. AEM is currently trading at an 11.5x FY22F
  • See

Wei Le CHUNG DBS Group Research | Lee Keng LING DBS Research | https://www.dbsvickers.com/ 2021-08-14
SGX Stock Analyst Report BUY MAINTAIN BUY 4.98 UP 4.730