Excerpts from DBS report

Analyst: Lee Keng LING & the Singapore Research Team

Re-rating catalysts intact
Semiconductor recovery playing out; maintain BUY and TP of S$2.38, pegged to +2 SD of its 2-year historical average. Recent data points and news surrounding the semiconductor industry reaffirm our view that the recovery is playing out.


Share price: 


Although AEM’s share price has increased to an all-time high and is trading at 10.4x FY2020F’s earnings, we have noticed that AEM’s forward PE closely tracks the semiconductor equipment billings, and remain bullish that the recovery will drive a rerating of its forward PE upwards to 12.1x FY2020F earnings.

We continue to believe that its key customer’s requirement of more test handlers, a structural increase in test times, and a diversification of revenue through new projects and customers will drive AEM’s growth.

Where we differ: We are more bullish on AEM’s earnings in FY2020F/21F and believe an uptick in equipment billings should drive a re-rating in its forward PE.

mgt4.18L-R: CFO Soh Wai Kong | CEO Chok Yean Hung | Executive chairman Loke Wai San. NextInsight file photo.Potential catalysts: Stronger semiconductor equipment billings, increased sales guidance, acquisitions, new revenue streams.

Valuation: Maintain BUY and TP of S$2.38, pegged to 12.1x FY2020F PE, +2 SD to its 2-year historical average.

It is currently trading at 10.4x FY2020F earnings, which is below its peers, Teradyne and Advantest, who are trading at 22.9x and 31.6x FY2020F earnings.

We are expecting a further re-rating of its forward PE upwards on the back of a recovery in the semiconductor cycle.

Key Risks to Our View: Single-customer concentration risk, escalation or continued protraction of geopolitical events, and FX risk.

Balance Sheet:
Net cash position with no debt. As of 3Q19, AEM has a cash balance of S$64.8m and no borrowings. In the last five years, AEM had close to negligible debt levels and has been financing its operations and acquisitions through its own cashflow.

It is currently on the lookout for potential acquisitions that could create synergies with its existing business.

High return on equity. AEM was able to achieve a high ROE of 73.1% and 45.5% in FY2017 and FY2018, respectively. This is higher than its industry peers such as Advantest, with a ROE of 28.7%.

Share Price Drivers:
US 3-month semiconductor billings. AEM’s share price and forward PE correlate closely to the US 3-month semiconductor billings. We believe that the current recovery and end-demand led by 5G and advanced devices will drive semiconductor billings and re-rate AEM’s forward PE.

Order book and sales guidance. Management provides guidance on its revenue which is estimated from its order book. In FY2018, AEM raised its sales guidance four times, which resulted in its share price increasing by an average of 4.0% on each of the days of the announcement.

Key Risks:
Single-customer concentration risk. Around 90% of AEM’s revenue is derived from Intel. Of which, c.50% of its revenue is from the sale of its equipment, which is lumpy in nature and dependent on Intel’s need to replace existing machines or increase its production capacity.

Re-escalation of the US-China trade war. The US-China trade war weighed heavily on the global manufacturing cycle, reducing the demand for semiconductor-end products as well as disrupting the supply chain. A re-escalation of the trade war could hamper the recovery of the semiconductor industry.

Full report here. 

Share Prices

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AEM Holdings1.9900.030
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