AEM Holdings
DBS Group Research analyst Ling Lee Keng and the rest of the brokerage’s Singapore research team have downgraded AEM Holdings to “sell” from “buy” as they see “testing times” ahead for the group.
AEM had reported a 30% y-o-y decline in its earnings of $43.9 million for the 2HFY2022 ended Dec 31, 2022, on Feb 24. “Weak outlook and poor visibility of key customer demand beget uncertainty for AEM. The outlook for its key customer could continue to be gloomy given weakness in the PC market and consumer electronics alongside the risk of recession, which could slow spending on data centres,” writes the team. “Macroeconomic headwinds could also affect Intel’s cash-generating abilities to finance its aggressive capital spending plans, which could run the risk of order deferments.”
Further to its downgrade, Ling and the team have lowered their earnings estimates for FY2023 to FY2024 by 42% and 37%, respectively, due to a “sluggish outlook” for its key customer. The reduced earnings estimate also comes from AEM’s revenue guidance of $500 million, which came in lower than expected.
The team has previously lowered its target price to $2 from $3.19. “We rolled over our valuations to nine times FY2023 to FY2024 earnings, slightly below the historical mean. AEM is trading above +1 standard deviation of its historical mean, and we expect further share price weakness given a much poorer outlook.”
Despite the downgrade, Ling and the team see a brighter outlook for AEM and the semiconductor industry. AEM, a pioneer in providing system-level test (SLT) solutions, is one generation ahead of its competitors, writes the team.
“Given its technological superiority, we believe AEM is well positioned to ride on the growing SLT market that has benefitted from the increased complexity of chips and increased test coverage requirements, alongside the need for advanced heterogeneous packaging,” it adds.
Due to the digitalisation push, the semiconductor industry is also “well poised” for growth “McKinsey projects that the semiconductor industry will become a trillion-dollar industry by 2030. Industry megatrends such as artificial intelligence, 5G and the Internet of Things will pave the way for test growth spending owing to higher test volumes and times. Longer test times would also require more of AEM’s components due to wear and tear.” —
Price target:
DBS Group Research ‘sell’ $2.00