|For the fourth time this year, KGI Singapore has raised its target price for AEM. It is now $4.24 compared to $3.61 (14-May-20), $2.60 (2-Mar-20) and $2.57 (15-Jan-20).|
Excerpts from KGI report
Analyst: Kenny Tan Jiunn Chyuan
|• Key competitor and key customer reported strong results this week. We continue to expect tailwinds for the System Level Test (SLT) industry, albeit being less bullish on further orderbook increases.
• Maintain OUTPERFORM with new TP of S$4.24. We think the increased spotlight on AEM will reduce valuation gap with peers, and re-assign a 14x PE peg to the company.
We may revise TP after AEM’s 1H20 earnings release, which will occur on the first week of August.
1H20 earnings season is now underway, with a variety of American companies reporting results in July. This week was particularly eventful as Teradyne and Intel both reported strong earnings results.
Teradyne reported 2Q FY20 results on Wednesday with 49% YoY sales growth and doubling non-GAAP EPS YoY.
Teradyne management cites improved shipments of System-on-a-Chip and memory test equipment as factors for growth, leading to yet another all-time quarterly high for sales and shipments.
Teradyne has also resumed the provision of quarterly guidance, giving a US 745-805mn sales forecast for 3Q FY20, minimally a 28% YoY growth.
A key highlight that Teradyne made was that SLT demand will drive growth in 3Q FY20, further confirming the health and strength of the SLT industry amidst COVID-19.
Intel’s 2Q FY20 results on Thursday/Friday was a mixed bag, as while the company largely beat street expectations, it forewarned that 7 nanometer products are 6-12 months behind schedule.
Intel’s 2Q20 sales are +20% YoY, fuelled by a 43% YoY gain in Data Center segment.
Intel has revised up full year revenue outlook, while trimming down Capex estimate to US$15bn.
Intel’s admittance of manufacturing delays and willingness to use external manufacturing raises questions over whether AEM’s testers will still be used in such scenarios, a question in which we hope to address during the analyst brief.
The three developments we have taken note of are:
|1) the various articles that AEM has appeared in recently, including their first feature on SEMI, one of the major international semiconductor trade associations,
2) a new CFO whom has a strong international background and cross-border experiences, and
3) a new acquisition, DB Design Group, that will seek to improve upon the types of consumables and accessories that AEM currently supplies for their test
The new capabilities offered by AEM now, such as a 24-hour R&D service, will appeal to major customers who operate across multiple US and Asia sites.
|Forecasts: We make minor amendments that revise PATMI upwards by S$100k – 200k.
Valuation & Action: Maintain OUTPERFORM, with increased 12M Target Price of S$4.24.
Our new TP is formed by 14x P/E peg to FY2020F earnings, which we see as feasible, given the increased international recognition that AEM is getting from both the business and investment crowd.
14x PE is still >50% discount to peers, and implies 9.4x EV/EBITDA and 5.7x P/B.
Risks: Possibility of key customer at peak Capex, US-China trade tensions, competitors’ R&D weakening AEM’s market position.
Full report here.