• AEM (SGX:AWX) proposed acquisition of CEI (SGX:AVV) for S$99.7m; we rate the acquisition neutral at best.
• Acquisition price is fair at 15.6x P/E which is the industry peer average.
• Estimated to be 11-13% accretive to AEM's FY19 earnings per share.

AEM Announced Proposed Acquisition of CEI Limited

• AEM announced a proposed acquisition of CEI Limited (SGX:AVV) for S$99.7m (S$1.15 per share), representing a 15% premium to the last CEI share price of S$1.00 (or a 20.63% premium to its 3-month volume-weighted average price (VWAP)).

CEI Limited is a contract manufacturer in the semiconductor industry.

• CEI Limited was incorporated in Singapore on 28 August 1999 and listed on the Main Board of SGX in March 2000. It is a high mix, low volume contract manufacturer for printed circuit board assembly (PCBA), box build, and semiconductor equipment manufacturing. CEI’s has operations in Singapore, Indonesia, and Vietnam.

Mix of all cash or partial cash-shares offering.

• The acquisition will be funded by internal resources. For each offer share of CEI, the shareholder may elect to receive either one of the following:
  1. S$1.15 in cash (“Cash Consideration”);
  2. S$0.9775 in cash and 0.0486 New AEM Shares (“85/15 Cash Shares Consideration”) – 2.56% of AEM’s share if all elect this option; or
  3. S$0.8050 in cash and 0.0972 New AEM Shares (“70/30 Cash Shares Consideration”) – 2.49% of AEM.

23.68% have accepted.

• Key shareholders who have tendered their shares include Mr. Tien Sing Cheong (Executive Chairman of CEI), Mr. Tan Ka Huat (Managing Director), and TIHT Investment Holdings (55% held by a wholly-owned subsidiary of TIH Limited (SGX:T55)). The tendered aggregate 23.68%.

Rationale for the Offer: Strategic Fit and Synergistic Benefits

• CEI’s PCBA capabilities will allow AEM to improve on its upstream capabilities and provide its customers with some supply chain diversification. It also provides AEM with a wider customer reach and potential for cross selling and making improvements to its manufacturing process to raise efficiency through sharing of know-how.
• Assuming 100% acceptance, the acquisition is expected to increase AEM’s FY19 earnings per share by 11- 13%

Our Thoughts

• We think AEM's proposed acquisition of CEI is neutral at best. The acquisition price is fair, at the Singapore industry peer average of 15.6x. While there is earnings per share accretion of 11- 13% based on FY19 earnings, we think that CEI’s business is not directly complementary to AEM’s business nor is it very helpful in advancing its technological capabilities.

Potential synergies.

• Potential synergies include cross selling of products and services and sharing of know-how to improve operational efficiencies. However, as the businesses are not directly complementary, we think that it may be difficult to realise any substantial synergies.

Acquisition price is at fair, at the Singapore industry peer average.

• The acquisition price is at a TTM P/E of 15.6x, which is at the Singapore semiconductor equipment makers’ peer average of 15.6x.

CEI’s business is commoditised and ex-growth.

• CEI’s services (PCBA and box-build assembly) are on the lower-value added range in the industry and command lower net profit margins (~5% in the last three years). Its net profit has also declined by 33% from 2015 to 2019.

Maintain Our Financials Forecast for AEM

• We are maintaining our AEM's financials forecast as we lack clarity on the deal – whether the deal will be successful, percentage of shares tendered, and the mix of cash and cash-shares offering elected.
• Maintain BUY on AEM with unchanged target price of $5.16 as we remain positive on AEM’s longer-term outlook.
• In the longer term, we are positive on AEM’s key customer, Intel’s focus and developments. We believe that its ramp up of its 10-nm semiconductor chips will continue to be driven by
  1. development of new technology (5G, IoT, autonomous driving, AI and quantum computing) and
  2. pandemic-induced structural changes (cloud computing and notebook).
• The pandemic has increased work-from-home and study-from-home arrangements and we believe that this is a structural change. Companies are considering remote working arrangements as they will be able to save on rent. Given the limited visibility but strong industry momentum, we do not rule out further earnings upgrade for AEM as seen in FY20F.
• We maintain our valuation peg at 13.7x FY21F earnings (same as its previous peak in 2018), which is at a discount to its international peer market cap-weighted average of 19.9x.

Source: DBS Research - 12 Jan 2021