LISTED over four months ago on the ACE Market, Aemulus Holdings Bhd, a Penang-based test equipment manufacturer, has a few positive catalysts going for it.
That’s at least according to an elaborate research report by CIMB Research issued this week, which pointed out that Aemulus should benefit from the growth in mobile data and cloud computing, and as a result, be able to achieve a commendable 35% compound annual growth rate over the next three years.
The research house has put a projected net profit by Aemulus of RM13.32mil (three sen a share) for its financial year ending Sept 30, 2016 and RM18.15mil (4.1 sen a share) for FY2017 respectively, compared with RM9.11mil (2.4 sen a share) for FY2015.
But can Aemulus live up to such expectations, considering the difficult global economic times?
Notably, the space in which Aemulus operates in, producing testing equipment for the semi-conductor industry, is dominated by much larger players.
The company’s CEO is not available to comment for this article.
But unlike other firms which have ventured into this space only to fade a few years later, Aemulus has been growing steadily since its inception in 2005. It was self-funded until 2010 when local venture capital firm Teak Capital Sdn Bhd, led by experienced venture capitalist Chok Kwee Bee invested an undisclosed amount into Aemulus.
Prior to the IPO, Teak Capital had a 9.74% stake in Aemulus, which has been diluted to 6.82% post-IPO. Teak Capital also sold close to 1% of its stake at the point of Aemulus’ listing.
In total, there was an offer for sale of 43.9 million existing shares sold during Aemulus’ IPO, which is not a common practice for small companies that list.
The top management of Aemulus were part of the vendors of the IPO shares although they still hold significant blocks. The CEO, chief operating officer and chief technology officer hold a combined stake of 32.9% in Aemulus.
Aemulus raised RM24.58mil from the sale of 87.79 million new shares during its listing exercise.
Of this, RM12.88mil is earmarked for working capital, RM6mil for research and development, RM2mil for the purchase of new equipment, RM1.2mil for brand and promotion spending as well as RM2.5mil for listing expenses.
Teak Capital’s Chok also holds the position of independent non-executive chairman in Aemulus.
Another notable shareholder who bought into the company during Aemulus’ IPO is Khazanah Nasional Bhd, which holds a 15% stake. Aemulus is involved in the design, engineering and development of Automated Test Equipment (ATE). ATEs are used by test companies and semiconductor manufacturers to ensure that integrated circuit chips in consumer electronics function well before the electronic items are assembled and shipped.
The integrated circuit chips can be found in wireless and radio frequency semiconductor devices such as mobile phones and smartphones.
Direct export sales contribute 60% to 65% to the group’s revenue, where Aemulus products are exported to Singapore, China, the United States, South Korea, the Philippines, Thailand, Germany.
Multinational corporations in Malaysia make up the remainder of Aemulus’ revenue. Its key customers are US-based Avago Technologies and Skyworks Solutions, which are two of the top three RF component designers globally.
These two companies accounted for about 55% of Aemulus’ group revenue in FY2015.
Part of the group’s growth plans is in its expansion plans overseas.
Aemulus is targeting to enter into two new markets, Japan and Taiwan, this year.
In November 2015, a new branch in Taiwan was set up to serve as a sales and support service centre that will assist the company’s entry into the Taiwanese market.
“We learnt that Aemulus is acquiring new customers in Taiwan.
“Taiwan is seen to be an attractive market for its tester products due to the nation’s extensive ecosystem of semiconductor service providers and outsource semiconductor assembly and test players,” said CIMB Research.
The research house sees the structural shift towards the faster 4G/Long-Term Evolution network as a major driver of demand for RF components.
Rising 4G network penetration augurs well for RF tester manufacturers like Aemulus, given the higher need for advanced tester equipment to support the proliferation of 4G networks.
“In spite of the expected slowdown in global smartphone shipment growth, we estimate smartphone RF content will increase in order to support the strong data demand,” said CIMB Research.
Avago Technologies expects RF content in smartphones to increase in tandem with the rise in network requirements, at over 20% annually. Apart from the transition towards 4G networks, there is also potential growth in enterprise data storage as another catalyst for Aemulus. The company was presented the opportunity in cloud computing following the development of a new tester, Amoeba 4600, in October 2014.
Amoeba 4600 was specifically designed to address Avago’s needs for testing enterprise storage chip.
Aemulus first shipped Amoeba 4600 to Avago in March 2015.
Revenue contribution from this product is expected to reach 40% in FY2016.
Thus, Aemulus is poised to benefit from rising demand for enterprise storage, driven by higher traffic volume from cloud computing and the Internet of Things.
However, Semiconductor Equipment and Materials International projects worldwide sales of new semiconductor manufacturing equipment to decrease 0.6% year-on-year to US$37.3bil in 2015.
This is attributed to the combination of lower demand for assembly, packaging and test equipment, and strengthening of the dollar.
This trend is reflected in the latest industry book-to-bill data which fell below the 1.0 level in the October-November period, indicating a softening in industry demand.
The prolonged weakness in equipment sales could bring downside risk to equipment manufacturers like Aemulus.
Despite that, CIMB Research is optimistic about Aemulus. It is putting a target price of70 sen for Aemulus, based on a forecast 2017 price-earnings ratio of 15 times. This is at a 20% discount over global ATE peers’ average of 18 times earnings, CIMB says.
“We project strong revenue growth for Aemulus, driven by higher shipment of its Amoeba testers and we believe that Aemulus’ fundamentals are intact given its strong products portfolio and highly-experienced management team,” said CIMB Research.