AEM Holdings - DBS Research 2020-06-29: Onward To New Highs


AEM Holdings - Onward To New Highs

  • Expecting prices to break out to hit new all-time highs.
  • US semiconductor equipment billings rose 13.6% y-o-y in May.
  • Telecommuting to drive demand for data center chips.
  • Upgrade AEM to BUY with a higher Target Price of S$3.53.

Momentum is picking up

  • Upgrade AEM to BUY with a higher Target Price of S$3.53 (previously S$2.87) as we lift FY21F/22F earnings and apply a higher valuation peg of 10.4x (+2 SD) 12-m forward PE.
  • We are raising our AEM Holdings (SGX:AWX)'s FY21F/22F earnings by 14%/23% to incorporate our view of a structural increase in the telecommuting space which will continue to drive demand for data center chips. We have also increased our 12-m forward PE peg to 10.4x (+2 SD) from 10.0x (+1.5 SD) as we believe momentum is picking up, justifying a higher multiple.

Positive developments in the semiconductor industry

SEMI is expecting global fab equipment spending to increase by 24% y-o-y in 2021.

  • On 9 June, SEMI announced that it is increasing its forecast of the global fab equipment spending in 2021 to S$67.7bn (+24% y-o-y), up 10% from its previous forecast. All product segments are expected to do well, with memory fabs leading, and leading-edge logic and foundry to rank second. We believe that the expected increase in spending on global fab equipment in 2021 is a positive development for AEM as it reinforces the current uptrend in the industry.

US 3-month rolling semiconductor equipment billings marks its eighth consecutive increase in May (+13.6% y-o-y).

  • To prevent the further spread of the COVID-19 pandemic, many governments have locked down their countries, substantially reducing consumer spending and suspending some business operations. Despite this, the US 3-month rolling semiconductor equipment billings increased to US$2.3bn (+13.6% y-o-y) in May. This represents the eighth consecutive y-o-y increase since October 2019, and we believe the continued upward trend will lead to an upward re-rating of AEM’s 12-m forward PE.

Telecommuting to continue to drive demand for data center chips (structural change).

  • Since our update on 1 April, we have continued to highlight that increased telecommuting as a result of working from home, will increase demand for unified communications and collaboration (UC&C) solution providers (Zoom, Webex, Microsoft Teams, and Skype) to upgrade IT infrastructure to cope with the surge in usage.
  • Below are some developments at UC&C solution providers:
    • Zoom: 173 million monthly active users as of 27 May, up from 14 million on 4 March
    • Webex: 324 million users in March – more than doubling in the US, four times in Europe, and 3.5 times in Asia Pacific.
    • Microsoft Teams: 75 million daily active users as of 1Q20, up from 44 million in the first week of March. Microsoft is also planning to bring Teams to consumers.
  • With the protraction of the pandemic and increase in work productivity from working-from-home, companies are able to assess the viability of having more flexible working arrangements. We believe that some of the increase in telecommuting due to remote working is a structural change as companies are able to save on costs (travelling and accommodation expenses) and employees’ productivity levels are greater. This will drive the longer-term demand for data centers and server processors, the segment which Intel is focusing on.

Top US chipmakers’ sales increased 10.9% y-o-y in 1Q20, inventory build +9.6% y-o-y.

  • Top US chipmakers such as Intel, Nvidia, and Broadcom, have reported an increase in revenue in 1Q20 despite the COVID-19 pandemic. While the outlook for the global economy has weakened, these firms continue to build inventory to cater to the expected increase in demand for semiconductor chips.

Re-iterate Intel’s positive developments

  • In our report on 30 April, we had highlighted that we are still overall positive on AEM based on several positive developments at its key customer (Intel). We believe the most important driver for AEM’s revenue is ‘Intel’s test time’.

Intel achieved better yields on its 10-nm chips.

  • Intel’s 1Q20 earnings call disclosed that it is achieving better yields on its 10-nm chips while it has axed its 14-nm Cooper Lake processor to focus on its 10-nm Ice Lake processor.

No changes to its plans – Intel to add c.25% capacity in FY20F.

  • Intel is not changing its plans of adding c.25% to capacity and could in fact be adding slightly more.

Intel saw notebook volumes up over 20% in 1Q20.

  • As many employees and individuals had to work-from-home, many took the opportunity to upgrade their PCs at home to cope with higher requirements and/or to keep themselves entertained. Intel saw notebook volumes up by over 20% in 1Q20 and is expecting a strong demand on PCs, heavily weighted towards notebooks.
  • Achieving better yields on its chips with smaller nodes, increasing production capacity, and higher chip sales will all increase test times, which will benefit AEM.

AEM - Earnings and Recommendation

Raise FY20F/21F earnings by 14%/23% on higher revenue.

  • In our previous update, we highlighted that we are maintaining our positive outlook on the industry but preferred to err on the side of caution given the uncertain economic backdrop. See report: AEM Holdings - DBS Research 2020-05-08: Higher Sales Guidance
  • However, after witnessing the continued positive developments in the industry and passing the peak of the impact from the pandemic, we are raising our FY20F/21F revenue for AEM by 13%/16% and accordingly earnings by 14%/23%.
  • We believe our FY20F sales forecast of S$506m, which is above Management’s sales guidance of S$430-445m is justified. Our previous FY20F sales projection was S$449m, which translated to a net profit of S$77.9m (17.4% margin vs 16.3% in FY19). 1Q20 earnings formed 46.4% of our previous FY20F earnings forecast.
  • Given that AEM’s 1Q20 earnings forms 40.7% of our revised FY20F earnings estimate and combined with the positive developments we are witnessing in the industry and for its key customer Intel, we believe our higher FY20F earnings estimate is justified.
  • See AEM Holdings Share Price; AEM Holdings Target Price; AEM Holdings Analyst Reports; AEM Holdings Dividend History; AEM Holdings Announcements; AEM Holdings Latest News.

Time for new highs.

Lee Keng LING DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-06-29
SGX Stock Analyst Report BUY UPGRADE HOLD 3.53 UP 2.870