• AEM has announced the acquisition of CEI Limited, a contract manufacturer listed in Singapore.
• The acquisition could help AEM’s vertical integration and customer diversification efforts.
• Reiterate ADD on AEM with Target Price $4.63. Next key catalyst will be the upcoming FY21F revenue guidance in 1Q21F.

Announces Acquisition of a Contract Manufacturer

• AEM (SGX:AWX), through its wholly-owned subsidiary AEM Singapore Pte Ltd, has made a voluntary conditional offer for CEI Limited (SGX:AVV), subject to the satisfaction of the pre-condition that the quotation of new AEM shares to satisfy this offer will be approved by the Singapore Exchange Securities Trading Limited (SGX-ST).
• CEI's shareholders can choose to accept the offer in one of three forms:
  1. S$1.15 per share in cash;
  2. S$0.9775 in cash per share and 0.0486 new AEM shares (85/15 cash shares consideration), or
  3. S$0.8050 in cash per share and 0.0972 new AEM shares (70/30 cash shares consideration).
• The offer is also subject to AEM acquiring (by the close of the offer) a more than 50% stake in CEI.

About CEI Limited (SGX:AVV)

• CEI Limited (SGX:AVV) (listed on the Main Board of the SGX-ST since Mar 2000) is a contract manufacturer which is involved in the design and manufacture of proprietary equipment, assembly of printed circuit boards, box-build, prototyping and value add engineering work, such as circuit layout and functional design.
• CEI also designs and manufactures its own brand of proprietary equipment for the semiconductor industry. Its factories are located in Singapore, Indonesia and Vietnam.

Offer Consideration

• The offer price of S$1.15 per share translates to an historical FY12/19 P/E of 13.9x, EV/EBITDA of 9.44x and 1H20 P/BV of 2.58X for CEI. CEI reported a net profit of S$7.2m for FY19 and a net profit of S$2.9m for 1H20. As at end Jun-2020, CEI’s net cash position was S$3.5m.
• On a pro-forma basis, the acquisition will be EPS accretive for AEM. The major shareholders of CEI with a combined 23.68% stake have given their irrevocable undertaking to accept the offer from AEM subject to the satisfaction of the pre-condition mentioned earlier. AEM intends to delist CEI if its offer is successful.

Rationale for the Acquisition

• AEM’s rationale for this acquisition is as follows:
  1. improved vertical integration with a higher level of control over quality and agility across the entire supply chain as we believe CEI has been supplying printed circuit board assemblies to AEM and possibly some box build support;
  2. CEI’s regional factories in Vietnam and Indonesia complement AEM’s presence in Malaysia and China, providing further options for customers who wish to have a wider source of manufacturing sites to choose from;
  3. CEI’s assembly and box build capabilities will further enhance AEM’s service and product offerings and in-house key capabilities; and
  4. AEM’s scale will provide wider customer reach and extensive cross-selling opportunities, as well as benefit CEI’s branding and positioning in respect of its semiconductor equipment business.
• The all-cash acquisition consideration amounts to S$99.7m. As at end Sep-2020, AEM’s cash balance was S$129.8m. The CEI acquisition will also help AEM reduce its single customer dependency from our estimate of 95.3% to 66.7%, based on pro-forma FY19 financials.

Reiterate ADD

• We reiterate our ADD call for AEM with target price based on Gordon-Growth derived P/BV multiple of 6.09x (unchanged).
• Re-rating catalysts are FY21F revenue guidance which we think AEM will issue in early-2021.
• Downside risks are delivery delays due to lockdowns/movement restriction extensions and loss of competitiveness by its key customer.

Source: CGS-CIMB Research - 12 Jan 2021