AEM: Re-rating catalysts include earnings guidance upgrade later this year

Excerpts from CGS-CIMB report published on 5 Apr 2018.

Analyst: William Tng, CFA

Fundamentals come up trumps AEM chairman Loke Wai San owns 1,345,161 shares of AEM, or a 1.993% stake.  NextInsight file photo ■ AEM today released its updated sales orders received of S$192m as at 1 Apr 2018. This represents a 67% increase from the last updated value of S$115m on 1 Feb. ■ Separately, we held a conference call for clients this afternoon to address their concerns about AEM following the share price declines these past two days. ■ We maintain our Add call and our TP of S$8.19.

Reassuring investors

● AEM released an updated sales orders today during the trading lunch break.

● As at 1 Apr 2018, AEM said its sales orders received for delivery in FY18 increased to S$192m. This represents a rise of 67% over the last sales order update of S$115m on 1 Feb 2018, and a 30% increase over the sales order of S$148m received on 1 Apr 2017 for delivery in FY17.

● AEM also maintained its FY18 guidance of at least S$255m in revenue and S$42m in profit before tax (issued on 22 Jan 2018) despite the current trade jitters.

● AEM highlighted that sales could seasonally peak in 2Q18 and 3Q18. At the same time, its major customer is now giving the company shorter order lead times and thus 4Q18 visibility is limited at this juncture.

Board changes

● As a result of the recent distribution in specie of Orion Phoenix, the previous largest shareholder of AEM, Mr James Toh, is now the single largest shareholder with a 7.75% stake.

● Mr James Toh will be appointed as a Non-Executive Non-Independent Director of AEM with effect from 5 Apr 2018. Mr Toh has publicly committed to stay a long-term shareholder of the company, according to AEM’s press release to announce his appointment.

Conference call
● Separately, we organised a conference call for clients to address their concerns following the share price declines these past two days.

● Investors were able to get greater clarity on:
a) AEM’s earnings guidance, which does not depend on its major customer’s business with Apple’s PC product line;
b) AEM’s own guesstimate that its Test Handlers (TH) are not widely used in its major customer’s PC related business yet;
c) AEM’s ability to offer a dumbed-down version of its TH to other customers and internally - the group is the early stages of exploring this possibility; and
d) AEM’s belief that there is a chance its major customer could start to replace some of its legacy TH in FY18.

Maintain Add William Tng, CFA, analyst, CIMB. ● We maintain our Add call and TP of S$8.19, based on 10x (15.3% discount to sector average) FY19F EPS. ● Re-rating catalysts are a) upgrade to its earnings guidance later this year, and b) on re-ordering of higher margin consumables. ● Downside risks are order cancellations/delays by its major customer.

Full report here.