Excerpts from CGS-CIMB report
Analyst: William Tng, CFA
|AEM HOLDINGS: Intel fights back
■ We lift FY19-21F core EPS by 6.5-14.5% as Intel seeks to expand its TAM and fight back against competition.
■ Maintain Add. We switch from P/E valuation to P/BV valuation to factor in the cyclical nature of the business. Our target price rises to S$1.44.
|Record profit in sight for FY19|
On 12 Sep 2019, AEM raised its FY19 guidance for the third time.
The company announced that its order book for delivery in FY19 has been increased to S$280m (previously S$255m) and that FY19 revenue guidance was between S$285m to S$305m (previously S$265m to S$280m).
What’s driving AEM’s guidance upgrade?
AEM’s guidance upgrades are being driven by orders from Intel.
In turn, we think Intel’s orders are being driven by
a) Intel’s decision to venture into new growth areas relating to data demand,
b) production technology migration, and
c) the need for system level testing.
AEM reports 3Q results on 1 Nov
Our base case expectation is that AEM could report 3Q19 net profit of S$13.2m (+16% yoy, -16% qoq).
In a bull case, we think net profit for 3Q19 could be S$15.7m (+38% yoy, flat qoq).
We lift our FY19-21F earnings forecasts given Intel’s efforts to expand its Total Addressable Market (TAM) and fight back against competitors.
We now see a stronger FY20 versus our previous expectation and the tapering of orders from Intel may be delayed to FY21.
Transformational performance shares
On 7 Oct, AEM issued an initial award of 1.3m performance shares to its Executive Chairman and its CEO.
The options are with respect to a 3-year (FY19-21) Transformational Roadmap and contingent on certain achievements.
A further 5.2m performance share options were granted to its Executive Chairman, CEO and other key management. This scheme aligns management’s interest with minority shareholders.
|Maintain Add with TP raised to S$1.44
We lift our TP to S$1.44 based on justified P/BV multiple of 3.24x on FY19F BVPS to factor in the earnings cyclicality.
Note that we used a 10x P/E multiple previously.
Potential re-rating catalysts include further order wins from its major customer.
The key downside risk to our Add call is order pullbacks/slowdown from its major customer.
Full report here.