SINGAPORE (June 12): Maybank KimEng is maintaining AEM Holdings at “buy”, saying the stock is deeply undervalued given FY20E earnings recovery on rising HDMT (High Density Modular Test) test handler sales and contributions from new products.
Maybank says the broader market selloff due to macro and trade concerns has overshadowed positive developments, such as AEM’s recent upward revision of FY19E revenue guidance to $225-250 million from $180-210 million.
“Maintain ‘buy’ with unchanged target price of $1.40 based on 3.1 times average FY19-20E book value,” says analyst Lai Gene Lih.
According to Lai, even in a drastic downside scenario of FY19-20E PATMI cuts of 11%/61%, which he believes is unlikely, the shares would be fairly valued at current levels.
Maybank’s scenario analysis assumes AEM does not win any more orders beyond the $209 million it has secured by April: AEM sells only 15 HDMT test handlers in FY20E instead of the current forecast of 38 and FY19-20E SG&A costs are similar to FY18’s $33 million despite reduced sales as AEM is likely to retain engineering resources for development projects.
Lai says AEM’s FY19E revenue guidance has panned out better than we originally expected in our Jan-19 initiation, despite headwinds faced by its main customer.
According to management, this may be because HDMT is proliferating at a faster-than-expected pace within its customer.
This may also be a signal of the importance of HDMT’s role within the core customer to help reduce testing costs.
“As such, we believe our thesis for an FY20E earnings recovery is intact, supported by the customer’s new chip launches and production capacity expansion,” says Lai, “We have also not factored in upside from the hybrid solutions project and Huawei.”
As at 2.26pm, shares in AEM are down 2.5 cents at 96 cents or 1.9 times FY20E book value.
