• AEM's upcoming 3Q2023 results, as everyone knows, will be dismal. It will be loss-making largely due to a one-off settlement of US$20 million. 

• Not just 3Q. The full-year 2023 is adding up to be a dismal year, with perhaps less than S$10 million profit to show, in stark contrast to the record-busting S$127 million net profit in 2022.

• Then why is CGS-CIMB now quick to upgrade the stock even before the 3Q results are out? Well, AEM, for one thing, is more than just about short-term profits as it has unparalled testing technology for semiconductor chips. 

• In the near-term, the key lies with AEM's key customer Intel -- it has announced expansion plans in 3 countries which will mean orders for AEM's testing equipment come 2024. That's what CGS-CIMB is saying. Read more below. 

Excerpts from CGS-CIMB report

Analyst: William Tng, CFA 

AEM Holdings -- Awaiting return of customer demand over FY24-25F

■ We expect AEM to issue its 3Q23F business update on 10 Nov 2023. We see 3Q23F revenue possibly declining 55.1% yoy to S$92.5m.


Share price: 


■ 3Q23F could possibly see a headline net loss of S$20.4m (in our view) due to S$26.7m expense relating to its arbitration settlement with Advantest.

■ Our FY23-25F forecasts are unchanged for now. On rollover to FY25F, our TP increases to S$4.11, and we upgrade our call to Add (Reduce previously).


We expect AEM to report S$20.4m headline net loss for 3Q23F

We think AEM Holdings will issue its 3Q23F business update after market closes on 10 Nov 2023.

In our view, 3Q23F revenue could decline 55.1% yoy and 24.6% qoq to S$92.5m.

We also expect AEM to expense off c.S$26.7m in relation to the settlement of its arbitration with Advantest in its 3Q23F results, leading to a possible headline net loss of S$20.4m.


 Preparing for the return of customer demand over FY24-25F


Large orders?

Its key customer, Intel, has announced further expansion plans in 2023...We believe Intel could possibly place orders for these facilities by FY24F.


AEM has taken the opportunity arising from the current lull in demand from its customer to improve operating efficiencies and further reduce its cost structure.

In our view, AEM should not require any further capex over FY24-25F as the new 365,000 sq ft plant in Penang is sufficient to meet customers’ needs.

Its key customer, Intel, has announced further expansion plans in 2023.

On 16 Jun 2023, Intel announced that it intends to invest US$4.6b in Poland for a new semiconductor assembly and test facility to meet demand that the company is anticipating by 2027.

According to a 31 Aug 2023 report by Reuters, Intel will invest US$1.2bn in Costa Rica (where the company has test and assembly facilities) over the next two years.

Also, on 17 Dec 2021, Intel held a groundbreaking ceremony to mark the construction of its new production facility at Penang as part of its US$7bn expansion plan in Malaysia.

This multi-phased expansion project consists of several buildings and is expected to begin production in early-2024F. We believe Intel could possibly place orders for these facilities by FY24F.

 Higher S$4.11 TP on rollover; upgrade to Add from Reduce

williamtng4.14William Tng, CFA.We maintain our FY23-25F forecasts but roll over our valuation to FY25F.

Our TP increases to S$4.11 based on 11.3x P/E multiple, its 5-year (FY19-23F) average. (previously 10.2x).

We upgrade our call on AEM to Add from Reduce as we look forward to net profit recovery for AEM in FY25F as demand from its key customer returns.

Downside risks include a further pushback in delivery timeline for customers’ testing equipment, weaker-than-expected recovery for the semiconductor industry, and slower global economic growth reducing customer demand for AEM’s contract manufacturing subsidiary.

Re-rating catalysts include stronger-than-expected orders from its major customer, and new customers issuing meaningful purchase orders to AEM.

Downside risks are delivery delays and the loss of its sole supplier status for its major customer, which would negatively impact AEM’s profitability, in our view.

Full report here

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