AEM Holdings Ltd (AEM SP)
Updated 5 May 2021
- AEM’s 1Q21 results were weaker than expected. 1Q21 sales of S$80mn and PBT of S$16mn is -45% and -64% on a year-on-year basis.
- FY21 to come in ~35% below our estimate. FY21 sales guidance of S$490mn at the midpoint includes the ~S$120mn contribution from CEI. Implied core sales of S$370mn is more than 30% below our estimates.
- Maintain OUTPERFORM with lower TP of S$4.36. While long term prospects remain bright, there is limited near-term upside from the current share price, based on available information. We expect catalysts in 2H21 where orders could possibly come in at a higher than expected volume.
1Q21 sales drop was larger than expected
Tools & Machines’ sales are back near 1Q19’s levels, where HDMT sales fall-off was larger than what we had expected. For reference, we had 30/53/45 HDMT sales pencilled in for FY19/20/21F respectively. 1Q21 profit margin at 16.6% was partially diluted by CEI’s single digit profit margins. However, without CEI, AEM’s profit margin was at 17.6%, from lost economies of scale.
AEM’s provision of FY21 sales guidance of S$460-520mn implies a peak in 2020. Management expects CEI’s contribution to be similar to last year, thus AEM’s core sales is expected to be S$320-400mn, around 65% of our FY21 estimate.
With the peaks come the troughs
The short term may look bleak for AEM as high-volume manufacturing for the next generation test handler is expected to come in 2H21. AEM has continued its acquisition spree in the meantime, with the ATECO acquisition to enhance their offering for the memory IC market. We expect the move to help open up opportunities to the likes of Samsung and SK Hynix, though we view Micron as the partner of highest likelihood, given their proximity to AEM’s current bases of operation.
Forecasts
We trim AEM’s FY21 core revenue contribution to around S$392mn, after moderating HDMT forecasts to around 2019’s level of production, while reducing next gen test handler forecasts. Total test handler sales estimates are trimmed from 82 to 64. Our forecasts continue to exclude CEI’s numbers, which we will look to integrate at a later date.
Valuation & Action
Maintain OUTPERFORM, with reduced 12M Target Price of S$4.36.
We maintain 14x P/E peg, but take a 50-50 blended diluted EPS between FY21 and FY22 for AEM’s core business, while including CEI’s S$6mn of profit as part of the valuation.
Risks
Weak order book, long-term competitiveness of key customer, US-China trade tensions. AEM’s size may also be a disadvantage in competing for so many major customers’ attention at the same time.
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