AEM - UOB Kay Hian 2022-04-29: Strong & Sustained Rebound In Orders To Drive Share Price Gains

AEM HOLDINGS LTD (SGX:AWX)

AEM - Strong & Sustained Rebound In Orders To Drive Share Price Gains

We expect aggressive capex by Intel and the set-up of the new Intel Foundry Services business to lead to sustained demand for consumables for older machines, while new fabs will lead to more orders for test equipment. We have not factored in new customers from whom AEM expects more meaningful contributions from 2022 onwards, while the acquisition of component manufacturer CEI Limited will drive meaningful cost savings.

AEM (SGX:AWX)'s key customer Intel Corporation’s (Intel) March IDM 2.0 strategy is a major bet that future demand and profitability lie in the packaging of modular dies (or chips), known as “tiles”, which can squeeze more compute within a single package. Driving towards that goal, Intel intends to build new fabrication plants (fabs) for these new “tiled” chips, and is expected to outsource the production of certain modules. Existing capacity has also been earmarked for the foundry services market.

Intel’s decision to maintain old fabs and build new ones means that AEM will enjoy:
1. steady demand for its consumables and services,
2. recurring but cyclical demand for equipment upgrades at Intel’s old fabs, and
3. demand for new equipment to test the new “tiled” chip products.
That said, AEM provides mainly backend test equipment, where demand typically comes 6-9 months following the installation of front-end equipment at the new fabs. Additionally, management expects engagements with 10 of the top 20 global semiconductor companies to result in meaningful revenue contributions in 2H22 and beyond.

We further estimate AEM to generate meaningful cost savings at the gross level of S$5.6m-9.0m a year, by in-sourcing some of its production activities to CEI Limited. At the entity level, CEI is expected to also contribute S$4.0m a year of incremental net profit to the overall group.
We believe our estimates are conservative as we have not factored in further upside from capacity expansion in CEI’s box-build business.

AEM reported revenue of S$373.2m for 2H21, driven by the volume ramp-up for new-generation SLT handlers as well as burn-in testers, and the consolidation of CEI which was acquired in 1H21.
We believe 2H21 is the inflection point for test handlers to contribute more meaningfully to AEM going forward. Assuming flat consumables and services sales, we expect 2022 full-year revenue to come in at S$720m – at the top end of the range guided by AEM.

In 2019 and 2020, AEM’s cost of raw materials as a percentage of revenue averaged 60%. For 2022 and 2023, we assumed flat cost of raw materials (excluding CEI’s cost of sales). We next assumed about 10% of these costs, or S$49m-54m of works, would be handed over to CEI and lead to cost savings based on CEI’s projected gross margin of 22% across the forecast horizon. This led us to derive cost savings of S$10.8m in 2022 and S$11.8m in 2023.
Based on these assumptions, we derived a group-level pre-tax margin of 18.7% and 19.8% for 2022 and 2023 respectively.

The target price for AEM is pegged to 2022F earnings of 15.6x, or +2 standard deviation to its historical five-year range, supported by a forward ROE of 25.6%. This compares to the Singapore peer average forward P/E of 10.1x and forward ROE of 20.6%. The valuation peg is supported by the positive outlook for AEM from 2022 onwards and the anticipated cyclical upturn of AEM’s business.
See
See the 30-page PDF report attached below for complete analysis on AEM.

Clement Ho UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-04-29

SGX Stock Analyst Report BUY INITIATE BUY 5.60 SAME 5.60