• It's been 3 trading days since AEM Holdings said a stock-take had uncovered overstated inventories. AEM attributed that to human error. The stock price has fallen 9.1% from $3.40 to $3.09.

• The impact on AEM's profit & loss statement for FY23 is significant, marking a year to forget for the company. An earlier setback happened in 3Q2023 when it took a US$20 million loss arising from a legal settlement with competitor Advantest.

AEM also had a sharp slowdown in business owing to a downturn in the semiconductor cycle (which appears to be on the mend now, though) 


Share price: 


• Below, CGS-CIMB gives its take on the situation, looking past the bad news to its forecast S$65 million profit for 2024. Its stock price target is kept at $3.76.

• Maybank KE also maintained its S$65 million profit forecast for FY2024 but cut its target price for the stock to $3.26


CGS-CIMB analyst:
William Tng, CFA

AEM Holdings Ltd --FY23F net loss expected

■ AEM announced on 14 Jan 2024 that a stock-take had uncovered overstated inventories due to human error.

■ We estimate that AEM will need to reflect S$25.1m higher cost of goods sold (COGS) for FY23F, leading to a net loss of S$12.2m for the financial year.

■ We maintain our Add call which is premised on AEM’s earnings growth potential (+57% yoy) in FY25F based on our net profit expectations.


Overstated inventories

On Sunday, 14 Jan 2024, AEM announced that a shortfall in the group’s inventories had been uncovered following its year-end 2023 internal stock-taking exercise.

Preliminary estimates by AEM suggest that the group’s inventories could be between 5% and 7% lower than the Sep 2023 figure of S$358.6m.

AEM attributed the shortfall to data entry errors that were not detected by the existing controls and processes in place during the migration of production to the Penang facility from Singapore.

 Operational impact


Currently, the findings do not have any operational impact, as AEM’s investigations had not uncovered any fraud, missing inventories, nor external supplier involvement.

The issue suggests improvements need to be made on AEM’s operations, internal control, and finance processes, in our view.

AEM’s business with customers will not be negatively impacted as requisite inventories to fulfill customers’ orders are intact, the company said.

AEM’s Vice President of Engineering (appointed 1 Feb 2018) is currently managing the operations and AEM will provide further updates when it releases its FY23F results.

 Financial impact


We estimate that AEM will reflect the inventory overstatement via its COGS (we assume the maximum 7% exposure of S$25.1m), leading to a lower gross profit.

This swings our previous headline net profit of S$8.6m into a net loss forecast of S$12.2m.

With a projected loss in FY23F, we also now assume that AEM may pay a token S$0.01 DPS instead.

 Reiterate Add


williamtng4.14William Tng, CFAWe reiterate our Add call (given positive net profit growth prospects) on AEM with an unchanged TP of S$3.76 based on FY25F 11.3x P/E multiple, its 5-year (FY19-23F) average.

Downside risks include a further pushback in delivery timeline for customers’ testing equipment, weaker-than-expected recovery for the semiconductor industry and slower global economic growth, reducing customer demand for AEM’s contract manufacturing subsidiary, as well as initial FY24F revenue guidance from its upcoming FY23F results release being significantly lower than our S$559.2m forecast.

Potential rerating catalysts include stronger-than-expected orders from its major customer and a rampup in orders from new customers. 

Full report here.

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