The Singapore penny stock crash of 2013 may still be etched in investors’ minds. But, shares selling for below S$1 each may still make good investments too, provided they have strong business fundamentals.
There is one company with a share price of less than S$1 that investors can consider for their portfolio right now. And that company is AEM Holdings Ltd (SGX: AWX). As a quick background, AEM provides handling and test solutions for customers who produce microprocessors, high-speed communications, Internet of Things devices, and solar cells.
From 2013 to 2017, AEM’s revenue and net profit have both grown at a fast pace. The top line rose 48.5% annually during the time frame, while the bottom line reversed from losses in both 2013 and 2014.
For the first half of 2018, AEM’s revenue jumped by 32.4% year-on-year to S$138.3 million due to higher sales orders for its test handlers and pans/kits from its major customer. Meanwhile, net profit surged 43.4% to S$17.7 million because of higher revenue and better profit margins.
As of 30 June 2018, AEM had a healthy balance sheet with S$46.3 million in cash and just S$0.3 million in total debt.
Due to its strong business performance, it was the best performing share in the past decade. But despite its strong share price appreciation over the last 10 years, it currently still has an attractive valuation in relation to the quality of its business.
What’s also interesting about AEM’s share price is that it got hammered recently. At S$0.825 now, AEM’s share price is significantly lower than the level of S$1.21 seen a day before its 2018 first half earnings announcement at end-July. The market may have been spooked as AEM said that the visibility for its business into 2019 remains unclear.
However, could there be an investing opportunity in AEM due to a price-value mismatch? During the 2018 first-half earnings release, Loke Wai San, AEM’s executive chairman, said:
“We continue to generate positive cash flow and remain optimistic of the long term prospects of our equipment and consumables. Our acquisitions are all progressing well with new customer engagements, and we are cautiously optimistic on securing several key customers in 2019.”
Between September 28 and October 2, Standard Life Aberdeen, the parent company of global asset management company Aberdeen Asset Management, increased its control of AEM’s shares from 4.76% to 6.12%.
Huawei picks AEM
On Tuesday (9 October), AEM announced that Huawei had chosen AEM’s test solution — developed by AEM in collaboration with a Chinese research institution — for “qualifying high-performance short reach cabling links for Huawei’s 5G backhaul network.” AEM will deliver the first test solution to test 100Gbps links for Huawei’s short reach 5G backhaul network next year.
AEM’s executive chairman, Loke, commented on the latest news:
“The combined advantage of AEM’s high performance communications cabling test system and our expertise in automating the test environment will enable us to achieve the stringent quality and cost targets for 5G component testing. We re-affirm our commitment to serve the 5G economy through our innovative solutions.”
The Foolish takeaway
AEM’s share price could go on to do well from here, like how it had performed for the past 10 years, or it could go on to falter with the dim visibility of its business for 2019. Investors wanting to invest in AEM should consider all aspects of the business, including the valuation, with a long-term horizon. The strong balance sheet of the company should help it to tide through any rough patches for the short-term though.
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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 recommended shares of AEM Holdings Ltd. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.