DBS Group Research's Ling Lee Keng has upgraded her call on AEM Holdings from "sell" to "hold" citing how the semiconductor industry has likely reached the trough, as seen from recent guidance given by the industry bellwethers.
In addition, AEM is seen to benefit because of its capabilities providing so-called system level test services.
"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," writes Ling in her May 2 note.
Ling reminds investors to be wary that the industry remains "fundamentally challenging" in the near term, as indicated by what is known of AEM's key customer, Intel Corp.
AEM's revenue is linked closely to Intel's capex, which is guided at US$19.8 billion for the current FY2023, down 20% below FY2022. AEM, on its part, has guided for FY2023 revenue that is 43% lower versus FY2022.
However, Ling notes that inventories have depleted significantly in 1Q23, suggesting that "we are near the trough" and that AEM could revise its revenue guidance upwards along the way.
See also: Test debug host entity
"With a higher revenue base, we also assume better margins and raise our earnings estimates by 30% for the current FY2023 and 38% for FY2024," she adds.
Ling's revised target price of $3.35, versus $2 previously, is pegged to AEM's historical mean of 10x FY24F earnings as the market looks past the chip glut in 2023 and anticipates a rebound in 2024.
