AEM's share price surged 41% to close at S$2.22 yesterday after it reported that its 1Q17 net profit jumped 17 times to S$4.1 million while revenue grew over 246% to S$42.1 million.
On the back of a strong order book, AEM said it expects to achieve:
• 9M2017 revenue of S$142 million (9MFY2016: S$70.1 million)
• 9M2017 profit before tax of S$17.5 million (9MFY2016: S$6.1 million)
Excerpts from CIMB report
Analyst: William Tng, CFA
AEM Holdings Ltd
■ 1Q17 core net profit came in above expectations at 35% of our full-year forecast.
1Q17 results above expectations
1Q17 results came in above expectations with core net profit at 35% of our full-year forecast. This was driven by a 276% yoy increase in revenue in the Equipment Systems business. One-off items in the 1Q17 results were minor. The 3 major one-offs were an exchange loss of S$0.1m, loss (due to currency translation) of S$0.7m for liquidation of dormant subsidiaries, and S$0.5m in write-back for inventory obsolescence.
In its 4Q16 results commentary, AEM had guided that it expects to achieve at least S$70m in sales and S$6.5m in PBT for 1H17. The company has since updated its guidance and now expects to achieve a 9M17 revenue of at least S$142m and PBT of at least S$17.5m
Likely to add some debt
Target price: $3.39
Looking at the 1Q17 cash flow, AEM generated S$5.3m in operating cash flow before working capital in 1Q17, a huge improvement over the S$0.3m generated in 1Q16. However, net cash after working capital changes in 1Q17 was S$2.8m due to higher working capital requirements. We believe AEM’s current net cash position allows it to explore some debt financing to fund its working capital requirements.
On track for a multi-year ramp-up
In its FY15 and FY16 annual reports, AEM’s chairman said that its product is supporting a multi-year ramp-up at its key customer. 1Q17’s results lend credence to these statements. In its 1Q17 results commentary, AEM once again guided for a positive business outlook as the company progresses on its multi-year rollout of its Test Handler platform.
“Catalysts and risks
As AEM has now proven its ability to execute well on mass production to meet its customer’s demands and based on its latest guidance, we raise our unit shipment assumptions over FY17-19F.
This leads to 40-50% rise in our EPS estimates. To better reflect the earnings momentum, we switch our valuation methodology to P/E (previously P/BV). We assign a 10x P/E multiple (20% discount to its major customer’s P/E, 34% discount to its key peer, Cohu’s P/E) to our FY18F, leading to a higher TP of S$3.39.
Full CIMB report here.