• AEM HOLDINGS LTD (SGX:AWX)'s 2Q19 core net profit of S$15.7m was 62% above our expectation of S$9.7m.
• The outperformance was due to strong orders from its key customer.
• Maintain ADD with unchanged Target Price of S$1.23.

2Q19 Core Net Profit 62% Above Our Expectations

• We had earlier flagged that we were expecting a minimum net profit of S$9.7m for 2Q19F. AEM’s 2Q19 net profit of S$15.7m beat our expectation by 62%.
• The beat came from the strong 35% y-o-y growth in revenue as AEM’s major customer ordered more test handlers in anticipation of its own product launch roadmap. AEM benefitted given its sole source supplier status.
• As 1H19 core net profit accounted for 79% of our previous full-year forecast, we raise our FY19F core net profit by 26.8%. Our FY20-21F EPS are tweaked as we fine-tune our expenses assumptions.

Outlook

• On 25 Jul 2019, AEM raised its guidance for orders to be delivered in FY19 to S$255m, from S$209m in Apr 2019. FY19 revenue guidance was also raised to a range of S$265m-280m from S$225m-250m previously.
• On its diversification efforts, AEM has delivered a few asynchronous modular parallel smart (AMPS) systems to a memory manufacturer. Its micro-electro mechanical system (MEMS) testing solutions division (Afore) has also received an equipment order for its wafer-level environmental sensor test solutions from a major German sensor supplier in the automotive and consumer industries.

Maintain ADD

• Our Target Price remains at S$1.23, still based on 2020F P/E of 10x (13% discount to sector average; previously in line with sector average previously). We maintain our ADD call.
• Potential re-rating catalysts include further order wins from its major customer, and new customer wins for AEM’s own handler platform and test solutions for optical fibre cables.
• Order pullbacks/slowdown from its major customer remains the key risk to our ADD call.
• As AEM's business remains very much order driven, some caution may be warranted on FY20 earnings expectations as its major customer may have front-loaded some of its requirements into FY19. Stronger-than-expected orders from its major customer is an upside risk to our earnings forecasts.

Source: CGS-CIMB Research - 9 Aug 2019