AEM has risen 164% in less than 4 months since “My Bull Case For AEM Holdings (AWX)” was published. I have to admit that the rate and extent of the rally exceeded my expectations; which nonetheless is a good thing. I was fortunate in the sense that the general market (STI) started to rally strongly at the start of the year till early April and that the semiconductor industry as a whole grew much stronger than many had expected.
At S$1.495 per share, AEM has a market cap S$97.2m. With a ttm P/E of 20.9x, does AEM have further upside? That’s what I’d like to find out in this article.
What has transpired since?
- Sales order book grew 127% from S$66.7m in Dec-16 to S$152m in Apr-17.
- More company buybacks (last purchase on 24th Feb 2017) and insider purchases
- 1 for 2 Bonus Issue
- CIMB initiated coverage with a target price of S$2.69 (pre-bonus issue) (S$1.79 post-bonus issue)
- Dividends increased by 145% from S$0.01 to S$0.0245
- Dividend policy of 25% implemented
- Improved financials on a pro forma basis
- Management provided a revenue and profit before tax (PBT) guidance for 1HY17 of S$70m and S$6.5m respectively.
Back-of-the-envelop Q1 FY2017 NPAT and EPS Forecast
Assuming Q1 2017 revenue of S$35m and PBT of S$3.25m; which is half of the 1HY17 guidance by management:
Profit after tax (17% tax rate) should be S$2,697,500. With 65,013,000 shares outstanding, EPS should be S$0.04149.
1Q 2016 profit after tax was S$241,000. EPS on a fully diluted basis was S$0.0055 (based on 44,011,129 shares outstanding). After adjusting for the recent bonus issue, Q1FY16 EPS should be around S$0.00367 retrospectively.
Putting both pieces together, I expect Q1 to be a blowout quarter in terms of net profit and EPS growth:
1Q 2017 net profit after tax growth = S$2,697,500 / S$241,000 = +1,019%
1Q 2017 EPS growth = S$0.04149 / S$0.00367 = +1,031%
Note: AEM’s Q1FY17 results will be released on 27th April 2017 after market close.
Back-of-the-envelop FY2017 NPAT,EPS, and Dividend Per Share Forecast
From the latest sales order announcement, AEM is confident in fulfilling S$152m worth of purchase orders in FY2017. Assuming net profit margin of 7.7%, derived from management implied pretax profit margin of 9.3% (S$6.5m / S$70m) and corporate tax rate of 17%:
FY2017 NPAT should be around S$11.7m
FY2017 EPS should be around S$0.18
FY2017 DPS should be around S$0.045 (25% of EPS)
On a forward basis, AEM is currently trading at 8.3x FY17 earnings with a prospective dividend yield of 3% (S$0.045 / S$1.495) on a low dividend payout ratio of 25%.
With peers such as Ellipsiz (11.9x), Avi-tech (12.3x), UMS (16.6x) and Micro-Mechanics (13,6x) trading at their current valuations with lower growth prospects, it does seem that AEM is still fairly undervalued with further upside potential.
The key risk in my analysis lies in the ability of the company to fulfil the S$152m worth of purchase orders without any hiccups as well as Intel not pushing back and/or cancelling orders (unlikely). Meanwhile, the upside risk is that AEM continues to receive more purchase orders to be delivered in FY2017, we are still less than halfway through 2017, so it is a real possibility.
I believe as long as AEM continues to execute well and meet/exceed profit guidance for 1HY17, the market will further re-rate the company. At the moment, only CIMB is covering the company; it will be a matter of time before more brokerage houses join in the fray which will accelerate the market discovery process.
What is really exciting is that AEM is a potential privatisation target. Given the controlling shareholder (28.22% stake) is a Private Equity Fund, I believe this mode of exit is a real possibility. A takeover offer will save a lot of time waiting for Mr. Market to recognise the company’s intrinsic value. The offer would likely be attractive given the controlling shareholder will have the most to gain/lose.
Taking Innovalues as an example, it was privatised last last year at a valuation of S$331.4m (P/E at approx. 12x FY17 earnings). Suppose AEM receives a similar takeover offer at 12x FY17 earnings, that would value the company at S$140.4m, which is 44% higher from current levels. AEM can be sold to its US-peers/competitors, Cohu or Xcerra. Both have market caps in excess of US$500m (S$700m), are in net cash position, and are currently trading above 12x FY17 earnings. Acquiring AEM would be earnings accretive and provide them with access to the intellectual property the company owns.
The prospects of AEM still remain bright. I am excited to see how things pan out over the next few months.
Disclaimer: I own shares in AEM Holdings.