AEM Holdings - DBS Research 2020-04-01: This Year Is Still Clear

AEM HOLDINGS LTD (SGX:AWX)

AEM Holdings - This Year Is Still Clear

AEM Holdings (SGX:AWX)'s FY2020F sales guidance unchanged; record-high revenue expected for 1Q20.
No disruption to Intel’s business operations.
Work from home drives server chip demand.
Maintain BUY with a lower Target Price of S$2.29.

Due to the uncertainty surrounding the COVID-19 outbreak, AEM released an announcement on 19 March (after Malaysia’s MCO announcement), stating that its FY2020F revenue guidance of S$360-380m remains unchanged. This represents a y-o-y increase of 11-18%.
AEM is also expecting record-high sales of S$135-145m in 1Q20, which is 38-48% higher than its last record quarter in 2Q19 (S$98m).

The Movement Control Order (MCO) issued by the Malaysian government requires all non-essential businesses to be shut down until 14 April. AEM has one factory located in Malaysia (Penang) and c.34% of its revenue in FY2018 was from Malaysia. However, we believe that with a portion of Intel’s chips used in mission-critical medical applications, AEM’s factory in Malaysia should still be able to operate, albeit at a reduced capacity.
Based on channel checks, AEM’s Malaysia factory is operating at c.30-40% production capacity during this period.

Intel’s factories are still in operation; cites uncertainty in outlook. Foundries and integrated device manufacturers (IDMs) are able to maintain their production capacity due to
1. their high degree of industrial automation, and
2. their critical importance in our daily operations.
On 19 March, Intel’s CEO announced that it is business as usual for Intel’s vast manufacturing operations despite the shutdown in the US. He said that it is filling more than 90% of orders on time. However, it also believes that there could be a financial impact on its business due to a slowdown in the global economy.

Governments and companies are implementing social distancing among their citizens and employees, advising them against face-to-face meetings. The US, Australia, India, Malaysia, Italy, and China (previously) are among countries that have shutdown business operations to curtail the spread of the virus. Companies are increasingly requiring their employees to work from home. As a result, meetings have moved to unified communications and collaboration (UC&C) solutions such as Zoom, Webex, Microsoft Teams, and Skype. These platforms are witnessing a spike in their users with Cisco (Webex) seeing a 22-fold increase in its network traffic in February.
To support the increased usage, these platforms require more computing power (processors). This will further drive the near-term demand for server chips, which is already facing a supply drought for the whole of 2020. There could be a shift in Intel’s production mix to cater to the higher demand from its data-centric business (DCG).

We continue to believe that AEM is well positioned to benefit greatly from its key customer’s requirement for more test handlers, a structural increase in test times, and diversification of revenue through new projects and customers.

Maintain BUY with a lower Target Price of S$2.29 on the deferred recovery. We are maintaining our FY2020F earnings forecast as management has indicated that its FY2020F’s sales guidance remains unchanged.
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In our opinion, Intel’s business in FY2020F will be supported by the strong demand for server processors. We are lowering our 12-month forward PE peg from 11.2x (+2SD) to 10.0x (+1.5SD) on the deferred recovery.