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AEM share price (SGX: AWX) in fairytale with Temasek Holdings

Will AEM share price become the next fairytale of SGX? Following the release of the 3rd quarter business update, AEM share price (SGX: AWX) has been in rocket form in recent weeks. The bullish form of AEM share price sent the counter to a record high of $5.22 on 30 November. Based on the current run of AEM share price, there is a good chance that the stock could knock iFAST off the perch to become the best performing SGX stock of the year.

Despite the positive business outlook, AEM share price has been rocked by the recent market turmoil caused by the Omicron variant. Amid the market chaos, AEM filed an SGX disclosure that Temasek Holdings purchased 443,700 shares from the market on 25 November. Although the shares were bought before the Omicron variant news, it provided much stabilizing support for AEM share price.

AEM share price

AEM share price

My vision for AEM share price is that it would become a $10 stock in SGX Mainboard. Having a conviction is important in stock investing as it can provide a calming effect when the share price movements are not in your favor. Obviously, the current AEM share price is still some way off my target level but my conviction is not based on blind faith.

First off, the bullish form of AEM share price had fended off short-selling attacks. According to data pulled from Monetary Authority of Singapore (MAS) Short Position Reporting System (SPRS), open short positions against AEM share price fell to a low of 1.77 million as of 19 November 2021. Prior to this, the open short positions amounted to a staggering 8.4 million as of 8 October 2021.

The presence of short-sellers can exacerbate the downtrend of stock movements. As in the case of the recent market sell-offs, we have seen how the bank stocks were brutally short sold. Take for example, short sales of DBS shares amounted to a high of 1.46 million and 1.24 million on 29 and 30 November respectively. The short sales saw DBS share price crashing to a level below $30 mark temporarily.

During the corresponding period, there were only short sales of AEM shares amounting to only 12,300 and 10,400 only. Because of this, AEM share price managed to ride out the recent market rout fairly well. Admittedly, it has not been a jolly ride for AEM share price as the counter fell from $5.06 on 22 November to $4.92 on 23 November due to a surge in short selling volume (136,900). Nevertheless, the overall trending seems to suggest a bullish movement ahead for AEM share price.

Note that this is an opinion article and not meant to be a financial advice. Please do your due diligence or engage financial advisors before investing in the stock market. I am vested in this counter, so my views on AEM share price (SGX: AWX) may be biased.

AEM share price in raging form

Despite the supply chain challenges, the explosive demand for semiconductor chips means that the outlook for AEM should be positive. Coupled with the increasing demand for System Level Testing (SLT), there is a strong possibility that AEM may become a billion-dollar revenue company. After all, the management has raised the full-year revenue guidance to between $525 million and $550 million.

For FY2021, assuming a full-year revenue of $530 million, the EPS should be $0.27 based on net profit margin of 16%. Assuming a PE ratio of 20, the projected AEM share price should be about $5.50 for FY2021. I believe this should also be the minimum AEM share price that Temasek Holdings is looking at because in the recent purchase, Temasek Holdings paid an average of $5.08 per share, which is significantly higher than the $3.85 per share it paid for in August 2021.

Going forward, AEM share price should continue to climb because of the volume ramp up for its next generation handlers. For AEM to meet the latest revenue guidance, the Group needs to achieve about $200 million in the 4th quarter. Given that the Group expects the volume ramp for the next generation SLT handlers to continue through 4Q2021 and into FY2022, AEM should be raking in about $200 million of revenue in each quarter of FY2022. Assuming net profit margin of 16%, the full-year net profit for FY2022 could be $128 million. This will translate to earning per share of $0.42. Attaching a PE ratio of 20, the forward AEM share price (SGX: AWX) could be $8.30.

Apart from the volume ramp up for Intel, the technical engagements with 10 out of the top 20 semiconductor companies will see the Group “receiving initial orders as a result of its efforts”. Hence AEM expects to “report meaningful revenue contribution from these engagements in 2HFY2022 and beyond”. In fact, AEM announced that it secured a new customer – a “leading memory integrated device manufacturer” on 31 August 2021.

I suspect that reason for the protracted negotiations with the semiconductor companies could be due to the patent crucial for its next generation System Level Test platform (patent no: 20210325452). The Group filed the application for the patent on 16 September 2020 but was only awarded the patent on 21 October 2021. The patent effectively paved the way for the volume ramp up with its key customer, Intel and the negotiations with the semiconductors.

AEM’s next acquisition target

With Grab debuting on Nasdaq on 2 December 2021, Temasek Holdings should be turning its focus on AEM’s Nasdaq IPO. At current AEM share price, the counter is slightly above USD1 billion valuation. While the conventional thinking is that such valuation is optimal for a Nasdaq listing, it may not be necessary be true in today’s volatile market conditions. Market sentiments and valuations play a key part in a stock liquidity. Take for example, Singapore-based Razor is in the midst of a potential management buy-out after its stock performed poorly in the Hong Kong Stock Market. Hence, a dual-listing in SGX and Nasdaq should not be taken lightly.

If I am not wrong, AEM should need at least one more acquisition. Hopefully, it would be one of the listed technology companies in SGX – Micro-Mechanics, UMS, ISDN or Frencken. With so much cash on hand and with Temasek’ backing, I would like the next candidate to be Micro-Mechanics, which produces tooling and precision components for the semiconductor industries. Micro-Mechanics’ business would fit in nicely with AEM as it could support the System Level Test Consumables segment, which had a Target Addressable Market of USD300 million. Furthermore, the recurring revenue nature of consumable parts will reduce the revenue volatility for AEM.

Apart from the good fit, Micro-Mechanics’ diversified customer base may also help AEM to secure more customers, thereby reducing the latter’s unhealthy reliance on Intel for business. To prepare for life after Intel, it appears to me that AEM is banking on its next blockbuster test equipment product – Asynchronous Massive Parallel (AMPS). This new capability allows high powered chip to be tested under thermal controlled environment without damaging the chip.

At the same, AMPS allow AEM to customize testing needs according to customers’ products. In today’s context, these are important factors because next generation chip dissipates a lot of heat and must be tested for reliability. As the design of HDMT and its fixture and components are highly customized to Intel chip products, it is difficult for AEM to customize HDMT for other semiconductor companies. In this regard, AMPS could be a game-changer for AEM. One that could make AEM great again.

Financial result

Looking at the latest financial result, it seems that the management had achieved a turnaround as guided by the previous business update. On a sequential basis, revenue and profit before tax increased over previous period to reach $146.2 million and $27.8 million respectively in 3QFY2021. There were two key takeaways from the latest business update.

Firstly, AEM’s business has been resilient and had not been impacted by the on-going supply chain disruption caused by the pandemic. Secondly, its technical engagements with 10 out of the top 20 semiconductor companies will see the Group “receiving initial orders as a result of its efforts”. Hence AEM expects to “report meaningful revenue contribution from these engagements in 2HFY2022 and beyond”.

Another driver for exponential revenue growth for AEM is the current front-end investments by major chip makers like Samsung, Intel and TSMC. Typically, the back-end investments will lag the front-end by a few quarters. Against this backdrop, AEM’s business is expected to be given a strong boost in 2HFY2022.

In 3QFY2021, the balance sheet strengthened with cash and cash equivalents increased to $204.1 million as at 30 September 2021. Total assets also increased by 90.9% from 31 December 2020 to record $640.5 million as at 30 September 2021. With so much cash on hand, will AEM embark on yet another acquisition? For the past two years, the Group has embarked on a series of acquisitions.

The acquisitions are necessary for AEM to build capabilities and enhance access to new customers. An example would be CEI, which was acquired because its printed circuit board assembly and box build capabilities are highly synergistic with AEM’s capabilities. The investment in South Korea’s ATECO enables AEM to access the memory market.

Conclusion

A potential listing in Nasdaq will be a major catalyst for the share price but the long-term business fundamentals still depend on whether the company can secure more semiconductor clients. On 31 August, the announcement of a new customer – a “leading memory integrated device manufacturer” – gave investors plenty to cheer about. The contract win indicates that AEM is not a one-trick pony after all.

Previously, I have set a personal timeline for this counter. By the end of the year, if AEM cannot secure a new major customer, I will exit this counter. Now that the management has secured a new major customer, my stance on this counter has altered. The coming months should be exciting as there is a possibility that AEM may secure 5 or 6 of the remaining 9 potential customers. If so, AEM share price (SGX: AWX) could be bullish in the coming months.

Will this counter rise to my expectation or turns out to be a fallen angel? Nobody knows for sure but I am taking a calculated risk based on the strong business fundamentals of the company. With so much upside potentials, I honestly doubt this counter will bomb out as the debt is nearly zero. Till then, enjoy the ride.[/wlm_ismember][This is a premium article. The rest of the content is blocked and can be accessible by SG Wealth Builder Members only. To read the full content, please sign up as member.]

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