AEM Holdings

Price target:

DBS Group Research ‘hold’ $2.26 Keeping an eye on the bigger picture

DBS reminds investors of AEM Holding not to “lose sight of the bigger picture” as it maintains a “hold” call despite winning a new customer.

Chip-tester AEM announced it has won a new business after an unnamed fabless firm selected its thermal control solution for advanced system-level test insertions.

As announced by AEM, this fabless provider is related to the high-performance computing and AI space. AEM will provide testing services for this customer’s next-gen AI devices.

Initial deliveries are slated to start in the current FY2024 ending December.

According to DBS Group Research in its April 22 note, the timing of the potential ramp hinges on the market’s receptivity to the new product and overall market demand.

DBS had already anticipated more of such announcements as AEM has guided for revenue in triple-digit millions from winning new test insertion contracts in FY2025.

As such, its current earnings estimates have already factored in the growth of new customer contributions at 9% of revenue in FY2024 and to further improve by nearly four times to $145 million the following year, or 23% of FY2025.

According to DBS, AEM has won over five new customers: one in memory, two in processing units, and two in systems and so-called hyperscalers.

DBS estimates high-single-digit growth in new customer contributions this year, albeit from a small base, which it expects will primarily comprise memory-related revenues given the upcycle in memory.

DBS believes that contributions from new processing units and systems and hyperscalers customers will be relatively “minor” this year as they are currently at the production intercept stage.

“As such, we are of the view that the tide will not turn until FY2025 when processing units and systems and hyperscalers customers are expected to enter into the ramp stage,” says DBS.

Thus, despite this latest customer win announcement, DBS has kept its “hold” call and $2.26 target price on this counter, urging investors not to “lose sight of the bigger picture”. This means test spending from AEM’s key customer, believed to be Intel Corp, remains uncertain.

According to DBS, in the middle of last year, Intel announced it identified an annual total savings opportunity of between US$4 billion ($5.45 billion) and US$5 billion, with financial savings from tests estimated at US$500 million per year by eliminating non-standard tests.

Citing a recent presentation from Intel, DBS observes that testing time for a next-generation client product is down 75%, raising the spectre that test times will decline across the board for AEM.

DBS figures that while AEM’s share of revenue from Intel could decline to around 45% in FY2024 and FY2025 from 50% in FY2023, it is still highly dependent on this key customer.

AEM is currently trading at around 13 times blended FY2024 and FY2025 earnings, and DBS does not expect the stock to rerate to 16–17 times around mid2022 when the ramp-up of new equipment for the key customer led to record profits that year.

“With no ramp-up of new generation equipment for the key customer in the next two years in addition to risks to test spend arising from the key customer’s expense discipline, we reiterate our ‘hold’ call on AEM with a $2.26 target price,” says DBS. —