SINGAPORE (March 27): CIMB Research is maintaining its “add” recommendation on AEM Holdings with an unchanged target price of $2.69, highlighting the counter as a one that is “counter cyclical for sure” in the present financial year.
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“We note that AEM announced on March 2 that purchase orders to be recognised in FY17 could reach $130 million, which makes our $138 million revenue target an easy beat if new purchase orders are received during FY17F. It would also be easy for the company to record y-o-y earnings growth in FY17F given the low base in FY16,” says analyst William Tng in a report last Friday.
A one-day non-deal roadshow (NDR) was recently held by CIMB to discuss the company’s business, total addressable market (TAM), length of current order cycle, as week as key risks and risk mitigation strategy.
In particular, Tng recalls that most of the 11 participants representing nine fund management houses who attended appeared “unfamiliar with AEM’s business and its current opportunities”.
AEM designs, builds and supplies high-density semiconductor Test Handler (TH) to its sole major customer, Intel.
See also: Test debug host entity
Given that Intel contributed more than 80% of AEM’s FY16 sales, the analyst says it is unlikely that the group can reduce its dependence on the company in the next few years, but points out that this is mitigated by the “lock-in effect” where both parties have spent considerable resources to ensure that their products work in tandem.
“AEM has sufficient patents to render a near-term entry by another supplier futile. At the same time, its customer cannot afford to wait for another supplier to develop as AEM’s current TH shipments are going into its production sites, making its products cost competitive,” says Tng.
With regards to the NDR participants’ interest in AEM’s product’s TAM and the group’s ability to meet it, Tng notes how the group noted that Intel was moving to a new testing platform requiring AEM’s TH, given the significant cost savings and volume shipments only began in FY16.
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“AEM has also ramped up capacity to meet the demand… What is more important to grasp is that the requisite consumables offer better margins and profitability should improve as the installed base grows,” opines the analyst.
While AEM’s major shareholder says it is currently under no pressure to exit the investment, Tng believes there are also “less disruptive ways” for an exit plan to be executed, such as a dividend in specie to its partners, which would reduce the size of the potential exit.
As at 1.27pm, shares of AEM Holdings are trading 2.7% lower at $2.14.
