Even More Attractive After Recent Sell-off

• We believe the broader market sell-off due to macro/trade concerns has overshadowed positive developments, such as AEM HOLDINGS LTD (SGX:AWX)’s recent upward revision of FY19E revenue guidance to SGD225-250m from SGD180-210m.
• We find the shares deeply undervalued and reiterate BUY; Our investment thesis remains driven by a FY20E earnings recovery on rising HDMT test handler sales and contributions from new products.
• Maintain BUY with unchanged Target Price of SGD1.40 based on 3.1x average FY19-20E P/B.

Scenario Analysis

• Even with in a drastic downside scenario of FY19-20E PATMI cuts of 11%/61%, which we believe are unlikely, the shares would be fairly valued at current levels (ROE-g/COE-g fair value SGD0.90, based on 2.1x average FY19-20E P/B).
• Our scenario analysis assumes:
  1. AEM does not win any more orders beyond the SGD209m it has secured by Apr-19:
  2. AEM sells only 15 HDMT test handlers in FY20E (current forecast: 38) and
  3. FY19-20E SG&A costs are similar to FY18’s SGD33m despite reduced sales as AEM is likely to retain/ expand engineering resources for development projects.

Momentum Could Last Into FY20E

• AEM’s FY19E revenue guidance has panned out better than we originally expected in our Jan-19 initiation, despite headwinds faced by its main customer.
• According to management, this may be because HDMT is proliferating at a faster-than-expected pace within its customer. This may also be a signal of the importance of HDMT’s role within the core customer to help reduce testing costs. As such, we believe our thesis for an FY20E earnings recovery is intact, supported by the customer’s new chip launches and production capacity expansion.
• We have also not factored in upside from the hybrid solutions project and Huawei.

Further Downside Could Lead to Consolidation

• Should our downside scenario play out, AEM would trade at FY20E EV/EBITDA of 5.9x, which is compares favourably to the 7-8x EV/NTM EBITDA that Cohu acquired Xcerra. In recent years, comparable transactions have occurred at a median 10x of EV/ NTM EBITDA.
• In our scenario analysis, FY20E dividend falls to SGD1.3cts, translating to 2% FY20E yield. This is because AEM has a 25% dividend pay-out ratio policy.

Source: Maybank Kim Eng Research - 10 Jun 2019