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AEM started at 'buy' by DBS as demand for new technology picks up

Stanislaus Jude Chan
Stanislaus Jude Chan • 3 min read
AEM started at 'buy' by DBS as demand for new technology picks up
SINGAPORE (Nov 29): Precision engineering services firm AEM Holdings is flying high. Year-to-date, its share price has more than doubled to close at $1.71 on Nov 28, climbing from 82.5 cents at the start of the year.
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SINGAPORE (Nov 29): Precision engineering services firm AEM Holdings is flying high. Year-to-date, its share price has more than doubled to close at $1.71 on Nov 28, climbing from 82.5 cents at the start of the year.

Yet, market watchers believe the counter is poised to soar even higher.

DBS Group Research is initiating coverage on AEM with a “buy” recommendation and a target price of $2.38, representing a potential upside of 39%.

“Our target price is pegged to 12.1 times FY20F price-to-earning (PE), and is well below its industry peers’ FY20F PE of 17.8 times,” says DBS lead analyst Ling Lee Keng.

“The share price trades closely to the semiconductor cycle and we believe that there will be a further re-rating of its valuation multiple as the cycle begins to pick up, driven by demand for new technology,” she adds.

AEM provides handling and test solutions to some of the most advanced manufacturers who operate in the 5G economy. Its clients include manufacturers of microprocessors, high speed communications, Internet of Things (IoT) devices, and solar cells.

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For 9MFY2019 ended September, the group has seen its earnings jump 23.8% to $36.0 million, as revenue climbed 5.2% to $234.5 million.

Revenue from its core Equipment Systems Solutions (ESS) segment grew 4.1% to $224.8 million in 9MFY2019, mainly due to an increase in orders from its main customer.

Meanwhile, revenue from System Level Test & Inspection (SLT-i) nearly doubled to $4.0 million and revenue from Test and Measurement Solutions (TMS) more than trebled to $2.1 million. The improvement for both were attributed to increase in orders from new and existing customers.

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“As technology nodes shrink, longer test times are required to perform more complex tests. In addition, systems and devices used in safety-critical markets… will require more stringent system level tests. These would lead to higher demand for test handlers,” Ling says.

Notably, the analyst says AEM can expect to see growth driven by its key customer, Intel.

“Intel has guided for a record-high capex of US$16 billion in FY2019 on the back of developments in new technology,” Ling says. “This should drive demand for test handlers, where AEM is believed to be the sole supplier.”

Ling notes that AEM is also currently working with Intel to provide hybrid extensions for their existing handlers. “These hybrid extensions will expand on AEM’s existing test handler’s capabilities and potentially enable AEM to gain a larger wallet share from Intel,” she adds.

While Intel remains a key growth driver, AEM is also diversifying its customer base across all its key business segments.

For instance, Ling points out that AEM is currently engaging new semiconductor and memory customers for its SLT-i business.

Under its Micro-Electro-Mechanical Systems (MEMS) segment, it has also received an order from a major German sensor supplier in the automotive and consumer industries for a wafer level test handler for environment sensors, the analyst says.

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Under its TMS business, AEM has also secured a contract to supply cable testing solutions for Huawei’s 5G rollout in 2019.

“We believe that there will be further upward re-rating of AEM’s valuation multiple as the semiconductor cycle begins to turn around, driven and catalysed by the 5G rollout and demand from new technology,” Ling says.

As at 1.30pm, shares in AEM are trading 8 cents higher, or up 4.7%, at $1.79.

According to DBS valuations, the counter is trading at an estimated PR of 10.3 times and a dividend yield of 2.4% for FY2019F.

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