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AEM Holdings Has Been Buying Back Its Shares. Here’s What You Should Know

AEM Holdings Ltd (SGX: AWX) has been aggressively buying back its shares on the open market. Share buybacks could indicate that the company’s management thinks its shares are undervalued at the moment. With that in mind, here are some things you should know about the company.

What AEM Holdings does

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The bulk of AEM Holdings’ revenue comes from the sale of test handler systems used in semiconductor manufacturing and the sale of consumables that are used for the aforementioned test handler system.

In 2018, AEM sales mostly came from a single customer, which while not specifically identified by the company, is believed to be Intel, one of the largest chip makers in the United States.

What has happened to the AEM in recent years?

In 2015, AEM holdings developed a new test handler system that had faster throughput and lowered the cost of testing. It also had the flexibility to be reconfigured to handle different chips. 2016 marked the start of its main customer’s multiyear implementation program for AEM’s new test handler system. As such, sales orders from 2016 to 2018 soared.

Unfortunately, towards the end of 2018, AEM management said that the upgrading cycle of its main customer was completed and AEM sales would likely start to get more volatile.

This caused panic among investors, who quickly sold the stock down.

In addition, the escalation of the trade war between the US and China may have also caused concern among investors.

In the most recent quarter, AEM total sales declined 19.7%, while its diluted earnings per share dropped 20.3% to S$0.0305. Its cash flow from operations also turned to a negative S$2.01 million from a positive S$6.40 million a quarter ago. 

The perfect storm resulted in AEM’s share price sliding more than 50% from its all-time high price of S$1.87 seen in early 2018 to its current share price of S$0.86.

Undervalued stock?

However, despite the negative news surrounding the stock, there could potentially be a light at the end of the tunnel. In its recent quarterly results, management said it has “received acceptance from Huawei for its test equipment and solution and a further sales order for equipment delivery in 2019.”

In addition, AEM has recently acquired another business initiative: the AMPS (asynchronous modular parallel smart) platform. The first solution from the AEM AMPS platform was delivered in early 2019. In my view, the AMPS solution and the cable-testing for Huawei should reduce AEM’s reliance on its major customer.

Management also upgraded its guidance for revenue between S$225 million and S$250 million in 2019, following additional sales orders received earlier this year. At the midpoint of the revenue guidance, it represents a 9.4% decline. Although it still represents a year-on-year decline, it is an improvement from management’s earlier guidance, which called for a revenue decline of 25.7% at the midpoint.

The positive news has perhaps led management to believe that shares are trading at unfairly low valuations now.

Assuming after-tax margins remain stable at around 13%, the revenue guidance calls for profit after tax of around S$30.8 million.

Based on the current share price of S$0.86, that translates to a forward price-to-earnings ratio of around 7.8, a low multiple, in my opinion. AEM also has a rock-solid balance sheet, with S$54.7 million in cash and just S$3.8 million in total debt as of 31 March, giving the company plenty of financial power to pursue share buybacks.

A Foolish Take

It has certainly been a difficult few months for AEM Holdings. But this could be the perfect opportunity for bargain hunters to snap up shares. The company has revised its revenue forecast upward, and its strong balance sheet puts it in a good position to continue rewarding shareholders. The share buyback scheme is also an indication that management might believe its shares are currently undervalued. Bargain-hunters who are looking for companies with strong fundamentals should consider taking a closer look at AEM.

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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 recommends AEM Holdings Ltd. Motley Fool Singapore contributor Jeremy Chia owns shares of AEM Holdings Ltd.