KGI Securities’ Kenny Tan has maintained his ‘outperform” rating for AEM Holdings, but with a reduced target price of $5.05, down from his previous figure of $5.26. 

Tan notes this was because he expects AEM’s “blistering” growth pace to decelerate this year, after six years of high double-digit growth which saw revenue expand close to 16 times from 2014’s trough. 

He said AEM remains fairly undervalued relative to test equipment peers, as investors seek shelter from the lack of forward guidance.

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AEM announced it will not be issuing a profit guidance until it has closed the offer for the acquisition of CEI, a contract manufacturer with focus on printed circuit boards and various semiconductor capital equipment involved in wafer sort and optical inspection.

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Tan says, “Though CEI’s acquisition is earnings per share (EPS) accretive for AEM regardless of which option CEI shareholders choose, we expect minimal positive sales impact with the acquisition, and for synergies to come from the cost end or from the strategic standpoint of supply chain diversification.” 

Its 4QFY2020 sales came in at $83.4 million, 5.9% lower y-o-y, while Profit after tax and minority interests (PATMI) is up 7.3% y-o-y. FY2020 core sales of $519million are in the upper range of AEM’s last profit guidance of $500-520 million. 

He noted production mix skewed back towards consumables in 4QFY2020, and that overall FY2020 mix is at 57% tools & machines and 43% consumables, a favourable mix for the longer term. 

Tan said while AEM has traditionally guided for machines to have lower margins than consumables, profit margin of 18.7% came in above his 18% estimate, supported by lower tax rates from a write back of tax provisions.

The analyst continues to forecast for about 6% y-o-y core revenue growth, after adjusting his product mix forecast to skew towards machine production over consumables. 

“Our profit margin forecast remains around 18% for FY2021/2022/2023… [and] currently excludes the impact from CEI’s acquisition” he noted. 

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“We maintain 14 times P/E peg, above AEM’s usual PE band as we expect continued tailwinds for the semiconductor capital equipment industry. Given AEM’s recent increase in production capacity, we may see further upside to our target price,” he adds.

As at 11.51 am, shares of AEM were trading at $3.87, with a FY2021 price to book ratio of 3.6 and dividend yield of 2.3%