Excerpts from CIMB report

Analyst: William Tng, CFA

Raises pretax profit guidance
AEM has raised its pretax profit guidance for FY17F and updated its 9M17F guidance. We previously highlighted that AEM’s pretax profit guidance in Aug 2017 was likely conservative.

AEM

Stock price: 
$2.87

Target price: 
$4.55

For FY17F, AEM now guides for pretax profit of at least S$32.0m vs. its previous S$24.0m guidance (+33.3%). It also guides for 9M17 pretax profit of S$25.0m- 27.0m, up 42.9-54.3% compared to its previous guidance of S$17.5m.

It said the higher guidance is due to higher sales, better margins and better operational efficiency YTD. 



Still has ample room to grow
williamtng4.14"Our earnings forecasts for AEM only consider the server chips and silicon on chip (SoC) business segments of its major customer. Given the stabilisation of AEM’s capacity build-up and its experience in assembling the test handlers, we believe FY18F would be a good time for AEM to address business opportunities with the customer’s computing devices business segment. Other possible growth opportunities include modem chips, Internet-of-Things (IoT) chips and automotive-related chips."

-- William Tng, CFA (photo)

Announced a small acquisition
On 30 Sep 2017, AEM announced its first acquisition to diversify its business and build on its test handler capabilities. The company announced the acquisition of InspiRain Technologies Pte Ltd (InspiRain), a provider of network infrastructure test and measurement solutions.

InspiRain’s innovative test products address large potential global markets. AEM plans to fund the purchase mainly via the reissuance of treasury shares and a smaller cash dividend payout, subject to certain performance milestones.

Associate Smartlex provides further diversification
AEM owns a 21.2% stake in associate Novoflex Pte Ltd (Novoflex), which in turn owns 100% of Smartflex Technology Pte Ltd (SFT) and Smartflex Innovation Pte Ltd (SFI).

SFT is a leading outsourced assembly and test company for smart card modules used in banking, while SFI has developed proprietary manufacturing equipment, processes and intellectual property for producing low-cost SIM card modules for telecommunications and smart card modules for banking.

Rolling over valuation basis
Given the positive pretax profit update, we raise our FY17-19F EPS forecasts by 19.3- 32.6%. We also roll over our valuation basis to FY19F, which raises our target price to S$4.55, still based on an unchanged 10x P/E multiple (18% discount to major customer’s P/E and 34% discount to key peer Cohu’s P/E).

A downside risk is pullback in major customer’s orders, while a potential catalyst is strong order momentum from the same customer.

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