CGS-CIMB Research analysts William Tng and Izabella Tan have retained their “add” call on AEM Holdings as they see the company’s strength in system-level testing (handlers and complete testing solutions) as “intact”.
“[AEM’s] long-term prospects remain strong,” Tng and Tan write in their Oct 14 report.
However, the analysts have slashed their target price on the counter to $3.76 from $6.54 previously on the back of fears of order deferments.
Amid the news of US restricting exports of chips to China as well as reports of possible job cuts at AEM’s major customer Intel, AEM’s share price plunged by 21.5% to $3.25 on Oct 13 from $4.14 on Oct 7.
The potential loss of the China market, in terms of how much of Intel’s data centre-related (DC-related) chips could be affected by the sales ban, is a concern, the analysts note.
With AEM’s expansion plan on track, with its Penang plant expansion expected to come online between end-October to early-November 2022 and Intel’s new multi-phased expansion in Penang expected to begin production in early 2024, Intel has leeway to defer its orders for test handlers (THs) from AEM.
See also: Test debug host entity
“We assume that such a deferment could occur over the FY2023 – FY2024 [ended Dec 31] and hence cut our sales assumptions for AEM by 6.7%-7.1%, leading to [a] 11.2%-11.8% decrease in our earnings per share (EPS) forecasts,” Tng and Tan write.
In their view, if the semiconductor industry is headed for decline in the FY2023, AEM’s valuations could revert to its six-year (FY2017- FY2022) average P/E multiple of 8.0x.
“However, we opine that AEM’s patented TH technology warrants some premium. Hence, we now value AEM at 9.7x (0.5 standard deviations or s.d. above its six-year average) on our reduced FY2023 EPS forecast given possible order deferments,” the analysts write. “Previously we used 14.9x (+2 s.d. above its six-year average).”
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To them, stronger-than-expected orders from AEM’s major customer and earlier-than-expected success in securing orders from other potential customers are re-rating catalysts to its share price. On the other hand, delivery delays and the loss of its sole supplier status which will negatively affect AEM’s profitability, are downside risks.
On Oct 14, AEM lifted its revenue guidance for the FY2022 to between $820 million and $850 million from its previous guidance of $670 million to $720 million on the back of increased demand from its new and existing customers.
Shares in AEM closed 7 cents lower or 2.2% down at $3.11 on Oct 17.
