AEM Holdings - Maybank Kim Eng 2020-11-04: Seasonality Normalising


AEM Holdings - Seasonality Normalising

AEM's 3Q20 earnings ahead; Maintain BUY

  • AEM (SGX:AWX)'s 3Q20 PATMI of SGD24.3m (+77.4% y-o-y, +27.1% q-o-q) was ahead of our and consensus expectations.
  • We raise AEM's FY20E PATMI by 3%, on the back of AEM's positively revised FY20 revenue guidance of SGD500-520m from SGD480-500m previously. However, our FY21-22E earnings are largely unchanged pending FY21E revenue guidance in Jan '21.
  • Maintain BUY and Target Price of SGD5.05 (14x FY21E P/E).

Key customer drives strong 3Q20

  • AEM's 3Q20 revenue rose 93% y-o-y to SGD161.8m, on the back of Intel's demand for tools, consumables and services. See AEM's announcements. System Level Test & Inspection (SLT-i) / Micro-Electro-Mechanical Systems (MEMS) / Test and Measurement Solutions (TMS) segments grew 67% / 86% / -16% y-o-y respectively. TMS' y-o-y decline was due to COVID-19 disruptions.
  • AEM will spend SGD2mil on R&D in 4Q20 for future projects, and have hired more staff to boost core engineering capabilities.

AEM's long term growth drivers unchanged

  • AEM remains positive on long-term growth prospects. The rollout of 5G enables increased complexity in mission-critical applications. This has resulted in unprecedented challenges in chip testing. Heterogeneous packaging is also becoming mainstream, as traditional Moore's law scaling faces limitations.
  • VLSI Research expects system level test (SLT) to grow 4.4x faster than wafer sort and functional test in 2020-24, as SLT is beneficial in overcoming limitations of current design-for-test techniques, which leave millions of transistors untested.

Opportunities to buy the dips may emerge

  • AEM expects seasonality patterns to normalise to 2Q/3Q being peak quarters, and 1Q and 4Q being lulls in any given year. This contrasts what was observed in 4Q19/1Q20, where these were the strong quarters within 2019/2020 respectively. This normalisation may imply difficult y-o-y revenue comparisons in 4Q20/1Q21.
  • At the same time, AEM's share price has risen 125% in the past 12 months. As such, we see risks of lacklustre AEM's share price performance until Jan-21 when FY21 revenue guidance is provided, and this may provide opportunities for investors to accumulate on dips.
  • See AEM Share Price; AEM Target Price; AEM Analyst Reports; AEM Dividend History; AEM Announcements; AEM Latest News.
  • Key risk is if Intel faces steeper than expected market share loss, which may temper the pace of equipment orders to AEM.

Gene Lih Lai CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-11-04
SGX Stock Analyst Report BUY MAINTAIN BUY 5.050 SAME 5.050