AEM Holdings - DBS Research 2020-08-05: Yet Another Strong Set Of Results; Testing New Highs

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AEM HOLDINGS LTD (SGX:AWX)

AEM Holdings - Yet Another Strong Set Of Results; Testing New Highs

• AEM's 1H20 net profit surges 148% y-o-y to S$55.3m.
• Higher sales guidance of S$460-480m.
• Structural trends due to new technology to continue driving a re-rating of its PE multiple.

Maintain BUY with a higher Target Price of S$4.96, re-rating to continue.

• We are still positive on AEM Holdings (SGX:AWX) based on the continued increase in the US semiconductor equipment billings and the longer-term semiconductor recovery.
• We believe that new technology (5G, electric vehicles, and AI), which continues to drive up demand in testing services, and the higher demand for cloud due to increased working-from-home, will continue to benefit AEM. As such, we are raising our valuation peg to 13.7x FY21F earnings, which is at its previous peak in 2018.

AEM's 1H20 results review

• AEM's 1H20 revenue of S$273.7m (+81.7% y-o-y).
  • High revenue was due to revenue growth in all business segments and higher sales to new customers.
  • Revenue from the company’s Equipment Systems Solutions business continued to account for almost the entirety of its revenue.
  • Consumables & Services to Tools & Machines revenue mix of 49-51%.
  • 2Q20 revenue: S$126.9m (-13.9% q-o-q, +29.6% y-o-y).
• 1H20 gross profit margin improved 2.5ppts to 39.2%, from 36.7% in 1H19.
  • Improvement in gross profit margin was mainly due to a more favourable change in product mix.
  • 2Q20 gross profit margin: 37.0% (1Q20: 41.1%; 2Q19: 35.9%).
• AEM's 1H20 net profit surges 147.9% to S$55.3m.
  • Net profit margin improved 5.4ppts to 20.2%, from 14.8% in 1H19 on the back of higher gross profit margin and better cost-control measures.
  • 2Q20 net profit: S$19.2m (-47.0% q-o-q, +21.9% y-o-y).
• Increased FY20F sales guidance by 7-8% from previous guidance.
  • New FY20F sales guidance of S$460-480m.
  • Previous guidance: S$430-445m in May.
• Proposed interim dividend of 5.0 Scts per share.
  • Representing a payout of 25% in 1H20.
  • Interim dividend payout was 2.0 Scts per share in 1H19. See AEM Dividend History.

Intel’s 2Q20: Stellar quarter but toned down on outlook

• FY20’s revenue guidance implies 2H20 revenue of c.US$35.4bn (-10% y-o-y). Intel’s management guided that they are expecting FY20F’s revenue to be US$75bn. This implies a 1H-2H revenue attribution of 53-47 compared to the typical 46-54% split.
• Cloud and communication service provider businesses grew more than 40% y-o-y in 2Q20. Critical cloud-delivered applications continued to scale and 5G buildouts accelerated.
• Accelerating 10-nm product transition. Expecting to increase 10-nm based product shipments in 2020 by more than 20% versus initial expectations in January.
• 7-nm based CPU product timing delayed by c.6 months. The delay is primarily due to the process yield, which is trending c.12 months behind its internal target.
  • Intel has identified the root cause and believes there are no fundamental roadblocks.
  • The company has invested in contingency plans (possibly outsourcing production to third-party foundries) to hedge against further schedule uncertainty.
  • Expecting initial production shipment of its first 7-nm based client CPU in late 2022 or early 2023.

Industry Development

Semiconductor equipment billings increase y-o-y for the ninth consecutive time.

• The momentum of the US 3-month rolling semiconductor equipment billings remained strong, increasing 14.4% y-o-y to US$2.32bn in June.

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.

Momentum from top US chipmakers indicates resilience.

• Top US chipmakers’ revenue dips 1.6% y-o-y, rises 0.4% q-o-q. Inventory increases 1.0% y-o-y, dips 1.6% q-o-q. Revenue and inventory levels remained resilient despite the COVID-19 pandemic.

AEM - Our View

1H20 results are in line with our expectations.

• AEM's 1H20 revenue and net profit formed 53.8% and 62.0% of our FY20F forecast respectively. We are expecting a lower net profit contribution in 2H20 as net profit margins normalise down to c.14-15% due to the presence of non-recurring items in 1Q20 resulting in an exceptionally high net profit margin of 24.6% in 1Q20 (2Q20 was 15.1%).

Intel’s potential outsourcing – not yet a problem.

• AEM has to work very closely with Intel to develop the company’s test handlers to its specifications and requirements. We believe that with such stringency and cost advantage in testing, Intel’s logic chips that are outsourced to third-party foundries will be brought back and tested in-house by AEM’s equipment. We do not view this as an immediate problem to AEM yet, but a potential longer-term threat could be a greater challenge to Intel’s market share as a chipmaker.

We do not rule out potential upward sales guidance revision.

• There could be room for more positive sales guidance revisions for the remainder of the year, which could be a catalyst for the share price if momentum in the industry remains strong.

AEM - Earnings & Recommendation

• Maintain BUY on AEM with a Target Price of S$4.96 (previously S$3.53) as we roll over to FY21F earnings and increase our valuation peg. We are maintaining our FY20F/21F figures. Our current FY20F revenue is 6-11% higher than the revised sales guidance.
• Our Target Price of S$4.96 is based on 13.7x (same as its previous peak in 2018) its FY21F earnings (previously +2SD of blended FY20F/21F earnings), in line with the valuation peg for other semiconductor plays.
• See AEM Holdings Share Price; AEM Holdings Target Price; AEM Holdings Analyst Reports; AEM Holdings Dividend History; AEM Holdings Announcements; AEM Holdings Latest News.

Higher PE peg of 13.7x is justified due to new technology and increased demand for data center chips.

• The complexity and shrinking nodes used in mission-critical applications in 5G, electric vehicles (EV), and artificial intelligence (AI) present unique test cost challenges for the industry and require longer test times.
• In addition, 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. This will benefit AEM as Intel (and the industry) will be requiring more of AEM’s equipment to test their chips.
• Our target PE of 13.7x is still at a discount to its international peer average of c.26x.

Singapore Research DBS Group Research | Lee Keng LING DBS Research | https://www.dbsvickers.com/ 2020-08-05

SGX Stock Analyst Report BUY MAINTAIN BUY 4.96 UP 3.530