Excerpts from KGI report

Analyst: Kenny Tan

• AEM reported 1H20 results with S$273.7mn sales (+83% YoY) and S$55.3mn PATMI (+148% YoY).

AEM 

Share price: 
$4.19

Target: 
$4.60

 AEM revised sales guidance upwards by another S$30mn, putting the FY20F goal post at S$460 - 480mn.

The company also affirmed that FY21 will see a ramp-up of next gen test handlers.

 AEM confirmed doubts over key customer’s business decisions. We think short/medium term expectations are rock solid, while long term doubts about process leadership remain.

 Maintain OUTPERFORM with new TP of S$4.60. We revise up sales estimate in line with AEM’s upward revision.


1H20 results in line
. Based on 1H20 results, 2Q20 implied 
revenue is at S$130mn, -11% QoQ but +32% YoY, with 14.7% profit margin, in line with our overall net margin estimate. 

AEM stuck to their 25% dividend payout policy and will be giving 5.0 Scts for 1H20 interim dividend, 250% more than 1H19’s 2.0 Scts.

AEM has also confirmed that FY21F will see a production ramp-up of the newest generation test handler.

AEM also proved us wrong with yet another sales guidance increase to S$ 460 – 480mn.

Given key customer Intel’s cut to 
Capex guidance, AEM will now take > 2% of wallet spend. 

Given the specialised 
use case of the new test handler, we think the sale count would remain much less than HDMT.

Outsourcing not an issue. Since Intel has indicated a willingness to outsource and use external manufacturing such as TSMC’s fabs, a key question we had coming into the earnings call was whether AEM’s testers would still be in use for these outsourced chips.

Good news were delivered, as Intel is currently using and highly likely to continue using their own package and test facilities, which means AEM’s equipment demand should remain unaffected by this development.

However, long term risks remain with regards 
to whether Intel can finally catch up and deliver its 10nm product line-up, and whether Intel can reduce the process leadership gap by being true to their word and producing 7nm process node chips in 2022.

Additional delays will chalk up 
greater uncertainty for AEM’s long term prospects.

 

Forecasts: We adjust test handler sales estimate, and thus revenue, to match AEM’s new guidance.

We revise down SGA 
and Capex costs to match AEM’s 1H20 results more closely.

Our FY20F profit margin forecast is increased from 18.6% to 18.9%, which implies 17+% margins for 2H20.

Our new FY20F 
sales forecast is S$474mn, +6.5% from prior forecast, and new FY20F earnings forecast is S$89.6mn, +8.4% from prior forecast.

Valuation & Action: Maintain OUTPERFORM, with increased Target Price of S$4.60.

KennyTanKenny TanWe maintain our 14x peg, established 
1.5 weeks earlier. 

Risks: Possibility of key customer at peak Capex, long-term competitiveness of key customer, US-China trade tensions, competitors’ R&D weakening AEM’s market position.

 


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