AEM designs, builds and supplies high-density semiconductor Test Handler (TH) to its sole major customer, Intel. that contributes to more than 80% of AEM’s sales, although a sole major customer might be viewed as a weakness, however in semiconductor testing this is somewhat mitigated because there is a “lock-in effect” where both parties have spend a lot of time and resources developing test solutions and handlers that is customized and not likely that Intel would so quickly look for another supplier for this unless something drastically becomes an issue. They also have sufficient patents filed to render short term entry by a competitor very difficult, creating a high barrier of entry - at least in the short term.

Looking at long term, recently this year AEM has also started to court new customers into new production technology by collaborating with UTAC (At the end of 2006, the company was ranked the fifth largest independent provider of semiconductor tests by Gartner Dataquest) to to jointly develop next-generation, cost-effective test system solutions for complementary metal-oxide semiconductor (CMOS) image sensor products. AEM provides advanced chip testing solutions, while UTAC has been offering CMOS image sensor assembly and test services in Singapore for many years. CMOS sensors are used in many applications and are slated as an area of continued growth for semiconductor as we advanced in AI and vision technology that demands more advanced and low cost sensing solutions.

At SGD3.48, I feel like AEM shares is still way below it's fair value with some estimates at 40% or more. However looking at the profits that is being generated, there is a sense of continuous value generation into the future. In the last 3 years from 2017, AEM has been growing very rapidly and shareholders have been happy to support the company as it grew. Over the last year alone, their EPS have grown from S$0.14 to S$0.31 at an astounding 125%! As a dividend paying company, over this year they have paid a growing dividend from $0.031 in May 2020 to the current payout of $0.05 last August.

With a strong balance sheet with a cash position of 137.9M which is slightly higher than the operating costs at 131.93M, at a revenue 161.83M (August'20), generating at net income of 24.34M which is a respectable 15% of revenue. The revenue also represent 35% growth from the quarter before and a steady growth over the last couple of quarters . EBIT margins improved by 5.9 percentage points to 23%, over the last year. All good signs of growth.

At current accumulation of S$435.5M, they are almost on there on the 2020 forecast of S$460M - S$480M in just 3 quarters with another to go. If we use an average of S$145/quarter this will put them well above those numbers with margin to spare.

Another sign of growth is that AEM has been hiring and acquiring (Mu-TEST) even through the Covid-19 season this year.

Insiders in AEM have strong vested interest to see the company growth as they currently hold S$88M worth of shares which represents a 9.5% of the total issues stock. This is definately a good thing.

With earnings that are forecast-ed to grow at about 5.4% per year which in fact grew by 137% over the past year. Obviously past records are not necessarily indications for continuous future growth. However with their next generation semiconductor handler for their key customer on track for FY2021 production ramp up, Mu-TEST integration going as planned and business in AFORE and TMS picks up the pace post Covid-19 things seems to be on the up side. On top of this, projected growth in the SLT (system level test) market at at CAGR of 21% is likely a ride that AEM will go on.

There are also some downsides, especially if you are in for the dividends (and who doesn't), as they have been paying unsteady dividends yields over the past years, partly due to the skyrocketing share price. Another risk is that the insiders have been selling a significant amount of shares over the past quarter (10.7M sold vs 1.4M bought) which does raise questions whether this is just simply profit taking or there might be something afoot.

So do you think that AEM will continue to grow at the rocket pace that it's going thru right now? Or you think there is something that might stall it's upward path. Let us know.

- CH Cheah

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