3rd Positive Revision to FY19 Guidance; Target Price +7%

• As a result of stronger than expected momentum, AEM HOLDINGS LTD (SGX:AWX) has raised FY19 revenue guidance for the 3rd time this year. In response, we raise FY19E earnings by 10%. Although FY20-21E earnings are largely unchanged, we continue to see upside from new projects.
• Maintain BUY with increased ROE-g/COE-g Target Price of SGD1.50, based on 3.2x (prev: 3x) blended FY19-20E P/BV.
• Strong 2020E orders is a catalyst for the stock, while a key risk is a sharp drop in the demand of the key customer’s chips.

Stronger Than Expected Momentum in FY19E

• AEM's FY19E revenue guidance is now SGD285-305m, up from SGD265-280m. We believe our new revenue estimate is conservative as AEM has received SGD280m of orders YTD to be fulfilled by the end of the year. The increase in guidance is driven by stronger than expected order momentum of HDMT and STHI test handlers, due to the rising significance of system level test at the customer.

New Projects Underpin FY20-21E Prospects

• We continue to see upside to our FY20-21E earnings, as these have not baked in the
  1. potential of frontloading of 2021 orders into 2020, as the key customer pushes for 7nm chips by 2021;
  2. contributions from the hybrid project for the key customer; and
  3. contributions from 5G cable test equipment for Huawei.
• Based on our scenario analysis of the first two factors, we estimate potential ROE-g/COE-g fair value of SGD1.77, on a blended FY20-21E basis.
• The FY20-21E earnings outcome of the scenario analysis is around SGD40m p.a., a sustained level despite FY19 shaping to be a high base.

Key Risks

• FY20 guidance, when released in Jan-Feb 2020, should give us a stronger basis to forecast contributions from the hybrid project and Huawei.
• A key risk to our forecasts is if there is if there is a sharp demand drop for the customer’s chips, as this could create slack capacity and delayed orders.

Earnings Revisions

• We raise FY19E EPS by 10% following the latest guidance revision by AEM. Drivers of a stronger than FY19E remain the same, i.e. the production ramp-up for the key customer’s 10nm chips, as well as the rising significance of system level test for the customer. However, momentum for FY19 has been stronger than we expected. While FY20E earnings are unchanged, we lift FY21E by 1% to account for a marginal increase in recurring consumables orders as a result of higher FY19E equipment sales.
• Our ROE-g/COE-g Target Price is based on 3.2x FY19-20E blended P/BV, which is in turn derived from blended FY19-20E ROE of 29.3%, COE of 10.6%, and LTG of 2%.

Source: Maybank Kim Eng Research - 16 Sep 2019