An Interesting SG Semiconductor Story – AEM Holdings(AWX.SI)

Of Late, there has been so much buzz about companies operating under semi-conductor business line. This buzz was primarily due to increased focus on 5G, Artificial Intelligence, IoT and EV. There is no absolute dispute on the growth prospects for this industry segment. But, for medium to longer term common investors, the prevailing valuation of company matters, a lot. Most of the listed companies, operating in such line of business, are trading at an astronomical level of valuation (up to 10-20 times its revenue). Also, citing impending US curbs on Chinese semi-conductor companies, there is a potential risk associated with companies operating in this line of business, if they have huge dependency on china markets.

There is one such company listed on SGX, that fits into these criteria – Less dependency on Chinese markets and priced quite cheaply (market cap – a little less than 2-times its 2020 revenue).  That company is AEM HOLDINGS LTD (AWX.SI).

Background

AEM was founded on July 21, 2000 and is headquartered in Singapore.  AEM has 6 R&D centers and 8 manufacturing plants in Singapore, Malaysia and China with a market presence in 20 countries spanning Asia, Europe and United States. AEM operates in below business segments –

  • Equipment systems solutions (ESS)
  • System Level Test & Inspection (SLT-i)
  • Micro-Electro-Mechanical Systems (MEMS)
  • Test and Measurement Solutions (TMS)

AEM generates the majority of the revenue (close to 97% of total revenue of FY2020) from the ESS segment. The ESS segment provides customized system solutions involving precise speed motion and mechanical design to both mass volume manufacturers and new technology development laboratories.

The SLT-I segment provides solutions that bridge the growing gap between user applications and standard ATE coverage with IC designs and packaging techniques.

The MEMS segment provides test solutions for Micro-Electro-Mechanical Systems and special wafer probing needs ranging from the R&D phase to high volume production and system-level testing which enables manufacturers to achieve the lowest cost-of-test, reduced time to market, effective process cycle, accurate stimulus, and high production yields.

The TMS segment engages in the research, development, and production of advanced communications and industrial test solutions.

Performance of its business segments

Below is its segment wise revenue breakdown –

All the four business segments have registered a growth except for MEMS. ESS segment has delivered 62.8% revenue growth. 

The commercial success of AEM’s high density modular test (“HDMT”) semiconductor handling platform, released in early 2016, has translated into volume ramp and higher sales for AEM since 4Q2016 till date (as the installed base of equipment at our customer’s sites increased).

AEM has been following organic and inorganic model of growth for its business segments. Under inorganic model, it increased the focus on industrial radio frequency (RF) test solutions, wafer level MEMS testing solutions and vision inspection by doing acquisitions in 2017 and 2018. It acquired InspiRain Technologies Pte Ltd (“InspiRain”) in September 2017, as well as Afore Oy and IRIS Solution Pte Ltd in March 2018. These acquisitions have been EPS-accretive at the firm-level and these acquisitions have helped the company in notable contract wins.

In January 2021, it did its largest acquisitions (in its operating history). It acquired the contract manufacturing company, CEI ltd (SGX listed company) in S$99.7 million. This acquisition is also EPS-accretive.

Geographical Revenue breakdown for the company is as below –

Revenue is evenly distributed across Malaysia, USA, Vietnam, China and others. China contributes almost 13% of its total revenue.

Valuation

ROE

Return on Equity (RoE) for last 3 years have been above 36%, which is quite impressive.

Dividend Yield

Current dividend yield is 2.3%. FY20 full year dividend was S$0.09 per share Vs S$0.051 per share. This represents a dividend payout ratio of 25.4% for FY2020. 

Price to Sales Ratio

It is close to 2, which is quite underpriced.

Price to Earnings Ratio

It is close to 10.9, which is quite underpriced.

How does the future look like for the industry?

In semi-conductor business segment, Equipment Market Data Subscription billings report (by SEMI) is widely followed by people tracking the industry level demands.  As per its report for the month, January 2021, it stands at US$3.04 billion (three-month average basis), the monthly billings have reached US$3 billion for the first time. This billings figure is 13.4% higher than the final December 2020 billings of US$2.68 billion and 29.9% higher than the January 2020 billings level of US$2.34 billion.

As per SEMI president and CEO Ajit Manocha, the acceleration of digital transformation is fueling strong, durable demand for semiconductor equipment.

(Billings in below picture is in millions).

It infers that the demand for the semiconductor items are still quite high. It certainly augurs well for a company like AEM holdings.

Disclaimer

Our content is for informational purpose only. We don’t recommend the stocks by such analysis. You must do your own research before undertaking any investment making decision.

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Published by Amit

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