Excerpts from KGI Research report

Analyst: Tan Jiunn Chyuan (Kenny)

• We initiate with an OUTPERFORM and TP of S$1.34, based on 11x 2020F EPS, a 39% discount to global semiconductor capital equipment manufacturers

• Latest 2019F revenue guidance from management in September is at S$285 – 305mn, representing a minimum 8.5% YoY increase


Share price: 


• AEM’s key customer, while currently facing stiff competition in its primary markets, is still likely to continue spending to stay on top

• AEM’s diversification efforts and recurring sales of test handler accessories can support the potential slowdown of its test handler sales

• We anticipate a dip in revenue and profits in 2020, but expect a rebound in 2021 as its major client migrates on to the next technology node

• Our estimates are on the conservative side as we have currently not included the potential upside from AEM’s new businesses

Investment Thesis: Upside surprises. 2019 is generally a difficult year for most semiconductor players, but not AEM.

ChokYeanHung 2.2018Chok Yean Hung, CEO of AEM. NextInsight file photo.Soft revenue guidance at the beginning of the year was consistently raised as the key customer continued ordering more equipment.

We think that the anticipated softness in 2019 may surface in 2020 instead, but 2021 should see a rebound in test handler sales to meet the key customer’s shift towards the 7nm chip process.

Diversification efforts bearing fruit. Since 2016, AEM embarked on diversification efforts with 3 acquisitions and a minority stake in a company, and has also developed its own modular test handler for other product markets.

These solutions have been well-received, with various key customers coming on-board. We think these solutions can cushion the impact of the potential softening of High Density Modular Test (HDMT) handler sales in 2020.

Forecasts. We expect 2019/20/21F core earnings to move 12.3/-11.0/15.0% YoY to S$37.3/33.2/38.1 mn. Our key assumption is in the forecast of 57/51/55 test handlers sold and flattish sales from new businesses.

We estimate for increasing gross margins due to sales mix towards the higher margin consumables.

We look to revise our forecasts when management gives FY2020 guidance, likely in Feb/Mar 2020. Refer to page 6 for our detailed forecast.

Valuation & Action: 

Valuation & Action

We initiate with an OUTPERFORM and TP of S$1.34 based on 11x 2020F EPS, an upside of 15.5%. Global semiconductor test equipment manufacturers are trading at 18x 2020F EPS.

"Our peg thus represents a 39% discount, which we believe lends enough margin of safety to our valuations

-- Tan Jiunn Chyuan (Kenny)
Analyst, KGI Research

At its current price multiple of 5.1x EV/TTM EBITDA, we believe AEM may also be an attractive target for an acquisition by larger test equipment manufacturers, given historic purchase multiples and the overall consolidation in the testing space.

To add to the margin of safety, we have not factored in much of the upside from its diversification attempts, which are currently gaining traction from different customers.

Applying an 11x P/E to 2021F earnings will yield a 33% upside with a TP of S$1.54.

Risks: Despite recent diversification efforts, over 80% of AEM’s sales is still largely derived from its key customer.

And while its revenue mix has stabilized between one-time, big ticket machine sales and consistent sales of pans, kits and spares, AEM is still dependent on these big order wins in order to maintain the revenue stream of maintenance parts.

Full report here.