DBS Group Research has initiated coverage of AEM Holdings, and has the highest target price among sell-side brokers.
Excerpts from DBS Group Research report
Analyst: Lee Keng LING
|"Testing” new highs
• Initiating coverage with a BUY and TP of S$2.38, representing a potential upside of 39%
• Key customer is increasing capex and production capacity
• New technology structurally increases test times, leading to higher demand for test handlers
• Diversification of revenue stream through new projects and customers
Leveraging on increasing capex for key customer. Intel has guided for a record-high capex of US$16bn in FY19 on the back of developments in new technology.
The company intends to continue to increase its 14-nm and 10-nm production capacities by 25% each in 2020 to meet customers’ demand. This should drive demand for test handlers, where AEM is believed to be the sole supplier.
New technology to drive longer test times, leading to higher demand for test handlers. As technology nodes shrink, longer test times are required to perform more complex tests. In addition, systems and devices used in safety-critical markets such as automotive (driverless vehicles), industrial, and medical equipment, will require more stringent system level tests. These would lead to higher demand for test handlers.
“…due to AEM’s customised solutions that stems from its 17-year working relationship with Intel, AEM is able to substantially reduce the cost of testing for its major customer. As such, Intel relies heavily on AEM for its test handlers. In addition, given our positive outlook on the areas Intel is focusing on and that Intel is a world-class semiconductor company, we believe AEM will continue to grow with its major customer and this is more of a boon than a bane.”
Diversification of revenue through new projects and customers. AEM is working with its key customer to develop hybrid extensions for the customer’s existing handlers as well as new technology used in quantum computing testing. Other initiatives include supplying cable testing solutions for Huawei’s 5G rollout.
Initiate with a BUY and TP of S$2.38, offering a potential upside of 39%. Our TP is pegged to 12.1x FY20F PE, and is well below its industry peers’ FY20F PE of 17.8x.
The share price trades closely to the semiconductor cycle and we believe that there will be a further re-rating of its valuation multiple as the cycle begins to pick up, driven by demand for new technology.
Key Risks to Our View: Single-customer concentration risk, escalation or continued protraction of geopolitical events, and FX risk.
Full report here.