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Friday, February 1, 2013

KEVIN SCULLY: Takeaways From Meeting With CEO Of AEM


This article was recently published on and is reproduced with permission
Kevin Scully, executive chairman of NRA Capital. NextInsight file photo
AEM – analysts meeting takeaways with new CEO Albert Ng confirm that 2012 will be a transition year but investors can expect a much better 2013/2014

I ATTENDED A briefing with the CEO of AEM yesterday in a post Q2-2012 result briefing.  The key messages for me from the meeting were:
a)      company has a strong balance sheet with cash of at least S$45mn - boosted by the money from SPIL.
b)      2012 will be a year of consolidation as AEM switches its test equipment from the old to new models which will generate another strong test equipment stream of revenue and profit over the next five years (see pictures below).
Old tester manufactured by AEM which sells for about US$200-300,000 each.
c)      The substrate business with new partner SPIL will be retooled during the rest of 2012 and should start commercial production in Q1-2013.  Output will be ramped up slowly and should reach full capacity by Q4-2013.  

MCT should be in the black in 2013 but dont expect meaningful contributions because of the run-in of the new equipment in the first half of 2013.  Substrate should be firing on all cylinders in 2014
New tester made by AEM that can do multiple testing and sells for between US$1.2-1.4mn each.
d)      SPIL investment in MCT will raise NAV by 3 cents to about 15-16 cents but implied value of AEM’s stake in MCT based on SPIL’s entry price is about S$35mn or almost equal to the market capitalisation of the company.  That means you are getting the profitable equipment business for free.
e)      Company has no fixed dividend policy yet – a lot would depend on capex and m&a opportuities but it has the ability to pay and did pay a dividend after it was removed from the SGX watchlist earlier this year.
I came away from the meeting feeling quite positive for 2013. 
Year to date, AEM stock has jumped about 50%, closing at 8 cents recently for a market cap of S$36 m.
Notwithstanding the current global uncertainties, AEM is in a comfortable position with two strong key customers – for text equipment (the largest chip manufacturer in the world – not disclosed by them but its not AMD), for substrate – SPIL their new shareholder in MCT consumes more than US$400mn in substrate a year. 

The maximum output from the MCT factory will be about US$50mn a year. 

So both businesses should have captive and stable demand in 2013 and 2014 providing a defensive slant to their business not currently enjoyed by other technology companies.
A second and important feature is the strong balance sheet with the cash in the company about 125% of its market capitalisation.
Overall, 2012 will continue to be a difficult year because of the transition with AEM bordering on breakeven to a small loss.  The company is already guiding in its Q2 and half 2012 results for a more difficult second half…… but 2013 should see earnings bounce back nicely.  It still remains in my Stock Picks but you have to wait for 2013/2014 to reap the benefits of its new products.

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