AEM Holdings (SGX:AWX) is part of the 5G revolution.
You see, the need for integrated-circuit (IC) chips is going to grow, as more companies are adopting cloud computing, 5G in electronic devices, “internet of things”.
IC chips are the small electronic components that makes your smartphones, computers, laptops and other electronic devices work.
According to the World Semiconductor Trade Statistics, global sales of semiconductor products is expected to grow by 8.4% by the end of this year.
Today, AEM Holdings is a S$1 billion IC chip-testing company listed in the Singapore Exchange.
It’s also one of Singapore’s fastest growing companies. At its core, this company designs and tests complex chips.
You can say it’s a solutions provider for “back-end” chip testing.
AEM Holdings is a profitable, “asset-light” business
Here’s the beauty of AEM Holdings — the business is asset-light.
Meaning, unlike the company’s customers who are big-time semiconductor makers, AEM Holdings doesn’t need to load up huge capital to run its business.
And because of the huge demand for semiconductors over the past few years, this chip-testing player’s free cash flow grew.
In fact, for a S$1 billion dollar company, its free cash flow already hit a S$107 million over the past twelve months.
Just recently in 2016, this company was still generating a negative free cash flow of S$2 million.
Now, in its latest financial year ending 2020, AEM Holdings’ sales grew a massive 60%, to hit S$519 million, compared to last year. While its net profits grew a solid 85% to S$97 million, compared to last year.
But I think AEM Holdings has a problem
Here’s the thing I don’t like about this chip-tester.
You see, 90% of its massive sales and earnings growth last year were mostly coming from one key customer — Intel Corporation.
Intel Corporation makes electronic chips for computers, laptops and servers and these are products from companies like Lenovo, HP and Dell.
And because Intel Corporation saw a surge for consumer electronics and the company also expanded into data centres and self-driving cars, AEM Holdings hit a goldmine.
Here’s the other thing that I’ve concerns — the risk comes if Intel Corporation decides to diversify its back-end testing vendor to reach out to other cheaper, perhaps more efficient, design and test chip companies.
When either of this situation happens, I probably expect AEM Holdings’ shares to crash.
Even though AEM Holdings started producing a solid free cash flow, it’s hard to tell if it’s ever going to be sustainable, especially for a small, chip-testing player.
Does AEM Holdings pay me good dividends?
You see, when I invest for the long term, I want to know the company can grow sustainably year after year.
And more importantly, whether its dividends can continue to grow every year.
If you want more dividends for your portfolio, check out: Your Retirement Guide: 8 Best Singapore REITs to Buy Now
Last year, it rewarded shareholders well.
AEM Holdings paid a total dividend of 9 cents per share, and that’s a 77% increased compared to the year before.
But looking at its past years record, AEM Holdings’ dividend payout consistency is poor.
Sometimes the company pays more, sometimes less.
For me, consistently growing dividends are a hallmark of a company’s financial excellence.
And AEM Holdings, in my opinion, is missing that critical piece of the investment puzzle.
Today, the company’s share price has rallied 132% since March 2020 last year, all because of the market’s huge positivity around Intel Corporation’s huge growth.
AEM’s dividend yield today? A tiny 2% yield.
Source: Yahoo! Finance
Mr. Market is hugely optimistic about AEM Holding’s future growth potential, despite the company having only one key customer.
And importantly, that’s what Mr. Market is overlooking.
For instance, if Intel decides to stop business with AEM Holdings today, I can tell you this small Singapore-listed company will simply crumble to the ground.
Along with its high performing share price.
To me, that’s a huge risk. And I’m not willing to stomach it.
Whould I buy AEM Holdings today?
Frequent readers will know I like to diversify my stock investments.
But I also want to make sure the high-quality companies I own in my portfolio knows how to diversify their own revenue sources too.
And that means these companies have a wide pool of solid customers.
Having Intel Corporation as the only big customer isn’t a great way to sustain AEM Holdings’ business. It’s risky.
If you ask me, I’m not ready to buy this stock at the moment.
Until, at least they can better diversify their customer base.
Sometimes, investing can be simple.
Always here for you,
Willie Keng, CFA
Founder, Dividend Titan
Editor’s Notes: I invite you to join our growing community simply by subscribing for our completely FREE email list. In it, you’ll received some of our best ideas about how to protect and grow your wealth safely.