• AEM’s 1H20 net profit was above our expectation at 64% of our full-year forecast.
• AEM has raised FY20F revenue guidance again to S$460m-480m versus its May guidance of S$430m-445m.
• We reiterate our ADD call with a higher target price as we factor in the new guidance.

AEM's 1H20 Net Profit Beat Our Expectations

• AEM Holdings (SGX:AWX)’s 1H20 net profit at 64% of our full-year forecast was above our expectations. 1H20 revenue climbed 82% y-o-y to S$273.7m due to strong demand from its key customer while net profit jumped 148% y-o-y to S$55.3m on account of such demand.
• Net profit margin for 1H20 was 20.2% and the company declared an interim DPS of 5 Scts.
• Free cash flow for 1H20F was S$37.6m. Net cash position as at end-Jun 2020 was S$136.2m.

AEM's FY20F Revenue Guidance Raised Again

• On 6 May 2020, AEM’s FY20F revenue guidance was in the range of S$430m-445m. The company has now raised this guidance to S$460m-480m.
• AEM intends to expand its efforts in developing and marketing its own AMPS (Asynchronous Modular Parallel Smart) platform to secure new customers. R&D spend will also increase by a further S$4.2m in 2H20 to support new projects.
• AEM also guided that its next generation test handler for its key customer is also on track for production volume ramp up in FY21F. In addition, we believe the next generation test handlers will primarily be required in testing data-related logic chips. Hence, the available addressable market may be as big as the desktop/notebook related chip market.
• As for recent developments at its key customer, we believe that testing of chips will be retained in-house by its key customer even as it outsources the production of its next generation chips as a stop-gap measure.

Reiterate ADD

• We raise our FY20-22F EPS forecasts for AEM by 13-68% to factor in the higher FY20F revenue guidance and update on FY21 production volume ramp up for its key customer.
• We reiterate our ADD call with a higher Target Price of S$4.63 based on Gordon-Growth derived P/BV multiple of 6.09x (previously 4.86x) as ROEs expand further given our revenue driven earnings upgrades.
• Re-rating catalysts are further increase in FY20 revenue guidance and better-than-expected profit margin.
• Downside risks are delivery delays due to lockdowns/movement restriction extensions and loss of competitiveness by its key customer.

Source: CGS-CIMB Research - 4 Aug 2020