While the share price of AEM Holdings Ltd (SGX: AWX) remains relatively flat since I wrote about the stock towards the end of May, I believe the strong earnings growth recorded in H1 FY2022 will be a catalyst for the stock’s recovery.
AEM’s revenue surged by 181% year-on-year (yoy) to S$540.5 million during the H1 FY2022.
This was mainly due to the ramp up of the new generation SLT (system level test) handlers, burn-in test handlers, and increased sales of consumables as well as contributions from CEI Pte Ltd, which was acquired by the Group in March 2021.
In line with the revenue growth, H1 FY2022 net profit jumped 180% yoy to S$82.8 million.
So, here are five reasons why I think investors should buy AEM shares after the company’s strong earnings in the H1 FY2022.
1. AEM’s revenue revised upwards for a second time
AEM revised its FY2022 revenue guidance from the range of S$700 million to S$750 million, to the range of S$750 million to S$800 million.
While this represents a slowdown in H2 FY2022, this is the second time that revenue guidance was revised upwards.
The positive revision is a reflection of the better-than-expected earnings in H1 FY2022. In fact, this was AEM’s best set of half-year results ever recorded.
Source: AEM Investor Deck, 15 August 2022
Given the continued earnings growth and better-valuation of the company at a price-earnings (PE) ratio of 9.6 times, this is a good opportunity for investors to accumulate this Singapore tech company.
2. Demand for Test 2.0 could grow 8x over the next eight years
Looking beyond FY2022, I am also positive on the outlook for the SLT test market amid the shift towards 5G, artificial intelligence (AI), automotives, Internet of Things (IoT), and cloud computing.
The increasing complexity in devices will require increased test coverage requirements.
In AEM’s Investor Deck on 15 August 2022, the company guided that the Test 2.0 market could grow 8x over the next eight years.
Given the increase test spend for integrated logic devices, I am positive that the overall robust outlook for the industry will benefit AEM.
That’s down to the fact the company has proven itself over the last decade.
Source: AEM Investor Deck, 15 August 2022
3. Better customer diversification with new client wins
There has been some concern in terms of customer concentration risk as Intel Corporation (NASDAQ: INTC) is AEM’s major customer.
During H1 FY2022, AEM generated two new customer wins.
AEM was selected as a supplier to a leading High-Performance Computing (HPC)/AI company and received orders for its customised, innovative test handling solutions.
AEM also received orders from a leading mobile devices company for its application processors.
These new orders will help AEM to expand its customer base and reaffirm the company’s complete solution offering for semiconductor test equipment and consumables.
4. Growth via M&A
AEM has also been acquisitive. It bought a 53.3% stake in Nestek, a South Korean company that specialises in the design and manufacture of pins and sockets.
The acquisition is in line with the Group’s M&A strategy to build a sustainable business model and it also allows AEM to further extend its offerings in the consumables business.
This is a positive development as consumables generally have higher margins – in excess of 40%.
The purchase builds on the acquisition of DB Design, a non-listed US company based in California that supplies automation fixtures, device kits and other test-related products.
The newly-acquired CEI has also just started to contribute to the Group’s revenue. The latest H1 FY2022 revenue figure comprises of 3.5 months of CEI revenue only.
AEM also has a strong cash balance of S$180.9 million, as at end-June 2022, that will be available for M&A spending.
As net gearing based on borrowings only stood at 0.178x, this provides the headroom for AEM to further expand via M&A in the near term.
5. Passing of US CHIPS Act beneficial to AEM
In the US, Congress just passed the CHIPS Act in July 2022 and this is expected to benefit AEM’s key customer; Intel.
The CHIPS Act mainly provides subsidies that offset the cost of building new fabs in the US, lowering the cost of research & development and also helping with workforce development.
While the impact from this is not immediate, this will help Intel to continue with its IDM 2.0 Strategy.
This should also help the front-end investments to flow into the backend by the third quarter of this year.
AEM offers a compelling growth story for long-term investors
The inflationary pressure and potential recession in the near term are downside risks for AEM but the company offers a compelling growth story long term.
While rising geopolitical tensions, global supply chain disruptions, inflationary pressures and record interest rate hikes have created a new set of uncertainties in the economic recovery going forward, AEM is in a good position to grow its market share.
It has a strong cash position, positive operating cashflow, and sustainable growth led by its order books.
Add to that the growth potential in the SLT market and long-term investors will find that AEM at a price-to-earnings (PE) ratio of 9.6 times and 3.0% dividend yield will be hard to ignore.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
