A little more than 2 months ago, on 27 Feb, DBS Research slashed its target price for AEM Holdings to $2 due to a downtrend in the semiconductor cycle and the weakness of Intel, its key customer. UOB KH and Maybank KE also lowered theirs to $2.78 and $2.66, respectively. However, CGS-CIMB maintained its $3.86 target as it looked to AEM's potential recovery in 2H2023 and beyond.  The market kind of agreed, and the stock has traded above $3 since April, touching $3.60 yesterday when DBS's new glowing report hit the market. Why the change in sentiment? See below.

 

Excerpts from DBS Research report

Analysts: Lee Keng LING (and the Singapore Research Team)

Optimistic of a recovery in 2H23

What's new
• Upgrade to HOLD with higher TP S$3.35

AEM 

Share price: 
$3.38

Target: 
$3.35

• Key customer guidance suggests that the PC market is bottoming, though servers have yet to bottom

• Near term remains fundamentally challenging for AEM but 2H23 recovery clearer now

• We revise our earnings estimates upwards by 30%/38% for FY23/FY24 as inventories and visibility improve


Penang123AEM non-executive chairman Loke Wai San (left) with Penang chief minister Chow Kon Yeow (centre) and AEM CEO Chandran Nair at the opening of the company's new manufacturing plant in Penang in Jan 2023. Photo: Company
Investment Thesis:
Retains technological superiority in system level test. AEM is a pioneer in providing SLT (system level test) solutions and is currently around one generation ahead of its competitors.

Given its technological superiority, we believe AEM is well positioned to ride on the growing SLT market that has benefitted from increased complexity of chips and increased test coverage requirements, alongside the need for advanced heterogeneous packaging.

S$100 m revenue from…

"The three new customers are in (i) memory, (ii) high-performance computing/AI, and (iii) application processor markets. We understand that the new customers could contribute c.S$100m in revenue in FY23 with capability ramps expected from early FY24."

-- DBS Research

New technology drives growth in test spend, leading to higher demand for AEM’s offerings in the long term. Notwithstanding near-term volatility, the semiconductor industry is well poised for growth owing to the push towards digitalisation.

McKinsey projects that the semiconductor industry will become a trillion-dollar industry by 2030. Industry megatrends such as artificial intelligence, 5G, and Internet of Things will pave the way for growth in test spend, owing to higher test volumes and test times.

Longer test times would also require more of AEM’s components due to wear and tear.

Near term remains fundamentally challenging for AEM on key customer weakness but there is optimism as the market cheers the chip bottom. Headwinds persist, and Intel’s weakness is expected to continue through 1H23.

Consensus estimates Intel’s capex – a key driver of AEM’s revenue – at US$19.8bn for FY23, c.20% below US$25.1bn in FY22.

Overall, we still believe that the near term remains challenging for AEM, with FY23 revenue guidance 43% lower than FY22.

However, inventories have depleted significantly in 1Q23, suggesting that we are near trough.

Upgrade AEM to HOLD with TP S$3.35 (S$2.00 previously). Our TP is pegged close to historical mean at 10x FY24F earnings as the market looks past the chip glut in 2023 and anticipates a rebound in 2024.

Ling Lee KengLing Lee Keng, analystThe full-year guidance of industry bellwethers affirms a rebound from 2H23, and inventory surpluses are expected to trend downwards after peaking in 2Q23.

We revise our revenue estimates by 18%/25% in FY23/FY24, as AEM could revise its revenue guidance upwards in addition to a rebound in FY24.

With a higher revenue base, we also assume better margins and raise our earnings estimates by 30%/38% in FY23/FY24.

 
Key Risks
Single-customer concentration risk, geopolitical events, and a prolonged slowdown in the macroeconomy.

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