SINGAPORE (Aug 18): CIMB is maintaining its “add” on AEM Holdings with $3.43 target price given management remains confident of a multi-year ramp-up of its business with its key customer after attending the group’s 2Q17 results briefing.
“We understand that in 2Q17, AEM’s catchup orders for consumables were in the $10 million range. This arose as some equipment – Test Handler (TH) – ordered by its customer excluded such consumables. However, some were indeed re-orders for consumables,” says analyst William Tng in a Thursday report.
In addition, Tng says AEM still has leeway to improve profitability. This includes substituting materials used in the production of TH with less costly alternatives, improving production efficiency as well as using its lower-cost Penang plant when it is becomes operational by end 4Q17.
While FY17 revenue and PBT guidance was $200 million and $24 million respectively, CIMB deems this cautious as AEM has outperformed its guidance since the company first started issuing them.
“Our view remains that AEM is just in the first year of a replacement cycle, driven by demand from its customer,” says Tng, “We like the prudence AEM is demonstrating by asking its customer to moderate its demand and the cautious capacity expansion at its end,” he adds.
As growth opportunities for AEM with its existing customer include the latter’s other business segments, AEM could also explore opportunities to supply other types of equipment for its key customer.
See also: Test debug host entity
The company is also considering small acquisitions. These could be testers that AEM could integrate with its TH or suppliers of materials/modules that AEM needs to produce the TH.
Major shareholder Orion Phoenix remains committed to a gradual sell down of its stake in AEM. Orion is essentially a private equity fund with an end of life by 2021.
“We think that an alternative exit plan that Orion Phoenix could consider is the appointment of a strategic adviser for a trade sale,” says Tng.
As at 1.26pm, shares in AEM are down 3 cent at $2.47.
