AEM Holdings - DBS Research 2020-11-05: Stellar As Ever; 3Q20 Net Profit Above Expectations, Higher Sales Guidance


AEM Holdings - Stellar As Ever; 3Q20 Net Profit Above Expectations, Higher Sales Guidance

  • AEM's 3Q20 net profit above expectations, increased 77.4% y-o-y to S$24.3m.
  • AEM's 3Q20 revenue increased 93.0% to S$161.8m.
  • Management raised FY20F sales guidance by 4% to S$500-520m.

AEM's 3Q20 Business Update

  • AEM (SGX:AWX)'s 3Q20 net profit was above expectations, increasing 77.4% y-o-y to S$24.3m on higher revenue.
  • AEM’s 9M20 net profit accounted for 89.3% of our FY20F earnings. 3Q20 net profit margins decreased 1.4ppts to 15.0%, from 16.4% in 3Q19.
  • We believe the decline in margins is due to the higher T&M product mix, which generally has lower margins.

3Q20 revenue jumped 93.0% y-o-y to S$161.8m on the back of increased orders for tools, consumables, and services.

  • AEM's 3Q20 revenue split from Tools & Machines (“T&M”) and Consumables & Services (“C&S”) was 74-26 respectively. Revenue from T&M increased 171.7% y-o-y to S$119.8m while C&S increased 5.8% to S$42.0m.
  • The typical revenue mix is 50-50 and we believe Intel increased its orders of test handlers from AEM to support the ramp up of its 10-nm chips.

AEM raised its FY20F revenue guidance to S$500-520m.

  • This is a 4% increase from its previous guidance of S$460-480m in September and is the fifth time management has raised its FY20F revenue guidance this year.

Intel’s 3Q20 Key Developments

Data Center Group (“DCG”) revenue declined 7.5% y-o-y as macroeconomic conditions deteriorated due to COVID-19.

  • A weaker macroeconomic environment weighed on its enterprise and government segment. We also noted a slowdown in growth in its cloud service providers and communications service providers segment. However, we think that this is also partially attributable to a “digestion period” following two consecutive strong quarters of y-o-y growth.
  • Enterprise and government: Revenue from Intel’s enterprise and government segment declined 47% y-o-y in 3Q20 on weaker macroeconomic conditions.
  • Cloud service providers: Revenue from cloud service providers increased 15% y-o-y on continued demand to support a work-from-home and study-from-home environment.
  • Communications service providers: Revenue from communications service providers increased 4% y-o-y as they upgraded their infrastructure to support the rollout of 5G networks.

PC-centric revenue was up 1.4% y-o-y as work-from-home and study-from-home drove strong notebook demand.

  • Intel’s notebook volumes increased 25% y-o-y on strong demand from the consumer and education segments as work-from-home and study-from-home increased.
  • Meanwhile, desktop volumes continued to decline, contracting 18% y-o-y in 3Q20.

Reduced FY20 expected capex by 4% to US$14.2-14.5bn, from its US$15bn guidance in 2Q20.

  • This is the second time Intel has reduced its FY20 capex guidance. We believe that this is to conserve capital amid the weakened economic growth prospects.

Divestment of NAND business allows Intel to focus on its core processor business.

  • On 19 October 2020, Intel divested its NAND memory business to SK Hynix to focus on its core processor business. We believe that this will benefit AEM as most of AEM’s focus is on Intel’s logic chips.

Ramp up of 10-nm chips is going faster than anticipated.

  • Despite less-than-ideal margins, Intel’s ramp up on its 10-nm volume is up north of 30%, faster than the initial 20% projected at the beginning of the year. Intel has expanded its capacity by more than 25% in FY20 and currently have three high volume manufacturing fabs producing 10-nm chips.

Industry Developments

  • The US semiconductor equipment billings passed its previous peak (May 2018) in September 2020, momentum in the industry remains strong. The US 3-month semiconductor equipment billings increased 40.3% y-o-y in September to US$2.7bn. September also marked the 12th consecutive y-o-y increase.
  • The World Semiconductor Trade Statistics (“WSTS”) and SEMI are projecting a stronger semiconductor industry in 2021. WSTS is expecting the world semiconductor market to expand by 6.2% y-o-y to US$452M, accelerating from a 3.3% y-o-y increase in 2020. Similarly, SEMI is projecting the global sales of semiconductor manufacturing equipment to increase by 10.8% y-o-y to US$70bn in 2021, up from a 6.0% y-o-y increase in 2020.

Our Thoughts, Earnings and Recommendation

Raise AEM's FY20F/21 earnings by 4/4% on strong 3Q20 results and higher revenue guidance.

  • AEM's management has a track record of beating its sales guidance in its previous years and we think this year is no different. We are raising our AEM's FY20F revenue by 4% to S$530.4m, which is above management’s guidance on a strong set of 3Q20 results. We are also raising our FY21F revenue by 4% to S$101.5m on a better-than-expected FY20F performance.

Look beyond near-term weakness for AEM as Intel’s business weakens and capex decreases.

  • Intel’s management believes the weaker macroeconomic conditions and “digestion period” for Intel could continue into 4Q20 and moderate demand from its cloud demand. In addition, Intel has further reduced its capex guidance for FY20. Both imply potentially lower spending on AEM’s test handlers, consumables and services in the near-term.
  • Furthermore, with 1Q and 4Q being typically seasonally weaker quarters for AEM (4Q19 and 1Q20 were exceptions), we are forecasting a weaker 4Q20 y-o-y and q-o-q. But we believe investors should look beyond this slight bump given the still rosy longer-term outlook and accumulate on weakness.

Maintain BUY with a higher Target Price as we remain positive on the longer-term trend.

  • In the longer term, we are positive on AEM’s key customer, Intel’s focus and developments. We believe that its ramp up of its 10-nm semiconductor chips will continue to be driven by
    1. the development of new technology (5G, IoT, autonomous driving, AI and quantum computing) and
    2. pandemic-induced structural changes (cloud computing and notebook).
  • See AEM Share Price; AEM Target Price; AEM Analyst Reports; AEM Dividend History; AEM Announcements; AEM Latest News.
  • The pandemic has increased work-from-home and study-from-home arrangements and we believe that this is a structural change. Companies are considering remote working arrangements as they will be able to save on rent. Given the limited visibility but strong industry momentum, we do not rule out a potential series of further earnings upgrade which was what happened in FY20F.
  • We maintain our valuation peg at 13.7x FY21F earnings (same as its previous peak in 2018), which is at a discount to its international peer market cap-weighted average of c.19.9x.

Wei Le CHUNG DBS Group Research | Lee Keng LING DBS Research | https://www.dbsvickers.com/ 2020-11-05
SGX Stock Analyst Report BUY MAINTAIN BUY 5.16 UP 4.960