Analysts are seeing a "year of headwinds" for AEM Holdings AWX although they believe in the group's medium- and long-term prospects.
DBS Group Research analyst Ling Lee Keng and the rest of the brokerage’s Singapore research team have downgraded AEM to “sell” from “buy” as they see “testing times” ahead for the group.
AEM had reported a 30% y-o-y decline in its earnings of $43.9 million for the 2HFY2022 ended Dec 31, 2022 on Feb 24.
“Weak outlook and poor visibility of key customer demand begets uncertainty for AEM. The outlook for its key customer could continue to be gloomy given weakness in the PC market and consumer electronics alongside the risk of recession which could slow spending on data centres,” writes the team.
“Macroeconomic headwinds could also affect Intel’s cash generating abilities to finance its aggressive capital spending plans, which could run the risk of order deferments,” it adds.
Further to its downgrade, Ling and the team have also lowered their earnings estimates for the FY2023 to FY2024 by 42% and 37% respectively due to a “sluggish outlook” for its key customer. The reduced earnings estimate also come on the back of AEM’s revenue guidance of $500 million, which came in lower than expected.
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On this, the team has lowered its target price to $2 from $3.19 previously.
“We roll over our valuations to 9x FY2023-FY2024 earnings, which is slightly below the historical mean. AEM is currently trading above +1 standard deviation of its historical mean and we expect further share price weakness given a much poorer outlook,” the team writes.
Despite the downgrade, Ling and the team sees a brighter outlook for AEM and the semiconductor industry at large.
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AEM, which is a pioneer in providing system level test (SLT) solutions, is currently one generation ahead of its competitors, notes the team.
“Given its technological superiority, we believe AEM is well positioned to ride on the growing SLT market that has benefitted from increased complexity of chips and increased test coverage requirements, alongside the need for advanced heterogeneous packaging,” it adds.
The semiconductor industry is also “well poised” for growth owing to the push towards digitalisation.
“McKinsey projects that the semiconductor industry will become a trillion-dollar industry by 2030. Industry megatrends such as artificial intelligence, 5G and Internet of Things will pave the way for growth in test spend owing to higher test volumes and test times. Longer test times would also require more of AEM’s components due to wear and tear,” says the team at DBS.
Maybank keeps 'sell' call, cuts TP
Maybank Securities analyst Jarick Seet has kept his "sell" call as he sees further downside ahead for AEM. While the group's FY2022 revenue and patmi stood above consensus, the figures came in below Seet's estimate due to lower margins.
As such, he has cut his FY2023 and FY2024 patmi forecasts by 34% and 11% respectively as AEM's margins are likely to face some pressure due to lower operating leverage as well as a potential margin squeeze by its main customer for its newer orders.
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Seet has also lowered his target price to $2.66 from $3.08 previously. The new target price is based on 9x blended FY2023/FY2024 P/E as he believes AEM's earnings will see a rebound next year.
"Due to a weak outlook for FY2023 as revenue may drop significantly, we believe there is downside risk. We are confident in AEM’s medium and long-term prospects, but short-term headwinds this year may continue to present lower entry price levels in the near term for investors," says Seet.
UOB Kay Hian keeps 'hold' call with lower TP as well
UOB Kay Hian analyst John Cheong has kept his "hold" call as AEM's FY2022 earnings stood slightly below his expectations by 4%.
"FY2022 was an exceptionally strong year from the ramp-up of its new platform and strong demand from customers, which resulted in revenue growing 54% y-o-y," writes Cheong.
"AEM released a conservative FY2023 revenue guidance of $500 million that may be revised as visibility becomes clearer," he adds. The guidance comes below the analyst's expectations of $707 million, leading him to lower his revenue forecasts for the FY2023 and FY2024 by 18% and 12% to $580 million and $639 million respectively. Cheong's earnings estimates have also been lowered by 26% and 19% to $86 million and $97 million for the FY2023 and FY2024 respectively.
"The reduction in our FY2023 revenue and earnings estimate is also to account for the weaker guidance from AEM’s major customers due to the increasing macroeconomic headwinds," he says.
In his report, Cheong notes that FY2023 may be a year of transformation with revenue from new customers expected to double.
"AEM is encouraged by the mid-term adoption of its Test 2.0 platform. The rapid adoption of artificial intelligence, 5G communications and the electric vehicle (EV) industry are trends that will drive the advancement of semiconductor technologies along with the need for a paradigm shift in tests. AEM has been making progress with its three recently-announced new customer wins, with capability ramps expected from early FY2024," he writes.
The analyst has lowered his target price to $2.78 from $3 previously although the new target price is based on an FY2023 P/E of 10x, pegged to the long-term forward mean P/E (previously 8x of FY2023 P/E, -1 standard deviation or s.d. of its forward P/E mean).
"The increase in our P/E multiple peg is to capture the improvement in earnings quality as AEM is expected to more than double the revenue contributions from its new customers in FY2023," says Cheong.
Shares in AEM closed 33 cents lower or 9.76% down at $3.05 on Feb 27.
