Strong FY19 Beat

• AEM Holdings (SGX:AWX)’s 4Q19 net profit of SGD16.7m (+281 y-o-y%/ +22% q-o-q) was a strong beat, largely driven by key customer Intel. FY19 net profit of SGD52.9m (+58%) accounted for 120%/ 117% of our/ street estimates.

All Cylinders Firing

• AEM's 4Q19 revenue grew 125% y-o-y/ 6% q-o-q, primarily driven by strong sales to Intel across all product lines and consumables. Further, other segments, such as MEMS (+48.7% y-o-y), SLT-i (+30.8% y-o-y) and TMS (+101.6%) are also gaining traction with both new and existing customers.
• Gross material margin jumped 7.3ppt y-o-y to 49.9% on the back of favourable product mix. Management indicate that FY19’s gross/ net margin levels of 40%/ 16-17% is a fair indicator of what is achievable for FY20.

Drivers of Upside; Limited Covid-19 Impact

• To-date, AEM has received order book for FY20 delivery amounting to SGD338m. Our FY20E revenue is at the mid-point of latest guidance.
• Drivers of upside may materialise from
  1. stronger than expected order momentum in FY20E; and/ or
  2. improving visibility of the traction from new products/ diversification initiatives as FY21-22E approaches.
• Management sees little to no impact as a result of Covid-19 currently, and remains fairly confident of delivering on latest guidance. That said, management will continue to monitor this situation.

Structural Beneficiary of Need to Lower Cost of Test

• With 5G, autonomous driving and AI applications driving highly complex chip integration and mission critical performance, AEM believes its sophisticated system level test (SLT) solutions can help customers test chips efficiently and with greater assurance. According to AEM and VLSI Research, the total addressable market (TAM) of SLT equipment and consumables is expected to enjoy a 2019-24 CAGR of 21.6% to USD3.2b.
• AEM expects to be a beneficiary of this given its entrenched know-how.

Raises FY20 Guidance

• We raise FY20-21E EPS by 6-12% to factor in management’s update to FY20 revenue guidance, now at SGD360-380m from SGD330-350m previously.
• We see potential for further guidance raises as a catalyst.
• Buy with Target Price SGD2.82

Source: Maybank Kim Eng Research - 26 Feb 2020