• We believe AEM Holdings (SGX:AWX) has shut down its factory for now as the Movement Control Order (MCO) of Malaysia kicks in; it is liaising with authorities to work out solutions to remain in production.
• We think the worse-case could be delivery delays for AEM but acknowledge risks to the additional S$20m orders we are currently expecting in FY20F.
• Reiterate ADD and Target Price of S$2.71.

Movement Control Order (MCO) Kicks in Today

• The Malaysian government is imposing a MCO for 18-31 Mar 2020 to slow the spread of the Covid-19 outbreak. This order requires the closure of all business premises, except for those supplying essentials, such as supermarkets and pharmacies.
• Our Malaysia office reports that local auto companies will comply with the order while the Malaysian Palm Oil Association is appealing to the government to allow its members to be exempted from the order.
• In the manufacturing space, it appears that most companies have stopped production and are in negotiations with the authorities to manage the situation.

Impact on AEM’s Operations

• We believe AEM will fulfill its role as a responsible corporate citizen and shut down its Penang factory today as it liaises with the authorities for exemption or a workaround, such as staggered production or continued production with a smaller workforce.
• We believe the Penang plant manufactures the legacy test handler (TH) product and also modules that are shipped into Singapore for AEM’s current THs.
• Given that Intel will also be affected by the MCO, we believe the worse-case currently is that AEM’s deliveries to Intel will be delayed. There is no reason to expect any order cancellation at this point in time, in our view.
• At AEM’s Singapore plant, we estimate that 30-40 workers are from Malaysia and some of them commute daily between Singapore and Malaysia. We believe AEM has managed to secure short-term lodgings for those that can remain in Singapore for this period.

Scenarios

• Based on the base case that the MCO is in effect for two weeks only, we believe there is room for production to catch up in 2Q20F/2H20F (if the situation worsens, this will not apply). We think AEM’s FY20F revenue guidance of S$360m-380m can still hold for now (see Fig2 in attached PDF report).
• However, our current FY20F revenue forecast of S$400m, which assumes more orders being received, could be at risk (see Fig3 in attached PDF report).

Reiterate ADD – Levels to Watch

• We reiterate our current ADD call and Target Price of S$2.71, based on an unchanged Gordon growth derived P/BV multiple of 4.05x.
• If our FY20F revenue forecast of S$400m cannot be met but AEM’s guidance of S$380m revenue is met, our Gordon growth derived P/BV multiple falls to 3.97x (S$2.62 per share).
• The valuation low to watch out for is S$1.225 (see Fig5 in attached PDF report).
• Potential order cancellation is a downside risk while stronger orders/new customer wins are upside risks.

Source: CGS-CIMB Research - 18 Mar 2020