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Why Did AEM Holdings Ltd’s Share Price Plunge 40% Even Though Its Half Year Net Profit Jumped 43%?

AEM Holdings Ltd (SGX: AWX), a company that mainly produces test handler systems for the manufacturing of semiconductors, released its earnings update for the first half of 2018 on Monday (30 July).

The company released a good set of results for the period but management cited a few concerns that may have spooked investors, causing its share price to nose-dive more than 15% the next day and a further 25% the following day. Here are some important things to note about the company’s latest earnings update.

Strong growth in earnings

In the first half of 2018, revenue increased 32.4% to S$138.3 million due to growing sales orders for its test handlers and pans and kits from its major customer (likely to be Intel). Net profit, likewise, improved 43.4%, from S$12.3 million to S$17.7 million. The better net profit was also due to cost efficiencies and better product margin.

During the period, AEM generated S$14.2 million in cash from operations and paid to acquire a subsidiary worth S$8.6 million. The group declared an interim dividend payment of S$4.4 million, amounting to S$0.015 per share.

In addition, AEM announced that to-date, it has received orders of S$235 million for delivery in FY2018. This was an update from the previous announcement in April this year, when the company said that it had received orders worth S$192 million.

Robust balance sheet

At the end of the reporting period, AEM had a strong balance sheet with just S$320,000 in debt and S$46.2 million in cash and equivalents.

The company also has retained a large percentage of earnings to reinvest on its business. This has increased the shareholder equity of the company by S$28.7 million or 24%.

The numbers seem good but why are investors spooked?

A quick glance at the performance of the company suggests that it is heading in the right direction. Management also reiterated that the company is on track for its earnings guidance of at least S$255 million in sales revenue and S$42 million in operating profit.

But on Tuesday (31 July) after the earnings announcement was made, its share price plummeted 16% to S$0.995. And nose-dived an additional 25% to S$0.75 when the market opened on Wednesday. So what spooked investors?

Perhaps the short answer to this is the fact that management made a few comments on its 2019 business prospects that may be slightly concerning for investors.

Management said:

“We expect to enter a rolling upgrade phase starting 2019, which may introduce significant volatility into our business. The pace of equipment upgrades will depend on our customer’s 1) timing of new product introductions, 2) utilisation improvements of our tools with increased familiarity, 3) seasonality, 4) market share and 5) commissioning of new manufacturing sites.”

As we can see from that statement, there is dim visibility on the demand for the new test handler systems in 2019. It is dependent on a variety of factors that are outside the control of the company. In 2017, more than 50% of AEM’s revenue came from the sale of new test handler systems. With the replacement of old test handler systems largely going to be completed by the end of 2018, AEM will have to rely on the sale of the consumable parts of its system in 2019 and sporadic upgrades of its major client’s test handlers. The uncertainty of future earnings is perhaps the overarching reason for the sudden drop in the share price.

The Foolish bottom line

Investors who were banking on the long-term continuation of the sales of the test handler systems may have been spooked by the comments made by the management team. With so many factors affecting the sales cycle of the new test handler systems, it is unclear what the profitability of AEM will look like in a year’s time.

I recently wrote a few positive articles on AEM but the recent comments made by the management make future earnings less clear. As an investor, I will be looking for more guidance in the future to see how things unfold.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has a recommendation on AEM Holdings Ltd. Motley Fool Singapore contributor Jeremy Chia owns shares in AEM Holdings Ltd.