AEM: $5.60 target set by UOBKH in initiation report

Excerpts from UOB KH report

Analyst: Clement Ho

AEM Holdings (AEM SP)

INITIATE COVERAGE
• System-in-Package design shift to revolutionise semiconductor manufacturing. Key customer Intel Corporation’s (Intel) March IDM 2.0 strategy is a major bet that future demand and profitability lie in the packaging of modular dies (or chips), known as “tiles”, which can squeeze more compute within a single package.

Driving towards that goal, Intel intends to build new fabrication plants (fabs) for these new “tiled” chips, and is expected to outsource the production of certain modules. Existing capacity has also been earmarked for the foundry services market.

• Sustained demand for AEM’s total portfolio. Intel’s decision to maintain old fabs and build new ones means that AEM will enjoy:

a) steady demand for its consumables and services,
b) recurring but cyclical demand for equipment upgrades at Intel’s old fabs, and
c) demand for new equipment to test the new “tiled” chip products.

That said, AEM provides mainly backend test equipment, where demand typically comes 6-9 months following the installation of front-end equipment at the new fabs.

Additionally, management expects engagements with 10 of the top 20 global semiconductor companies to result in meaningful revenue contributions in 2H22 and beyond.

• Acquisition of CEI to lead to cost savings. We further estimate AEM to generate meaningful cost savings at the gross level of S$5.6m-9.0m a year, by in-sourcing some of its production activities to CEI Limited (CEI).

At the entity level, CEI is expected to also contribute S$4.0m a year of incremental net profit to the overall group.

We believe our estimates are conservative as we have not factored in further upside from capacity expansion in CEI’s box-build business.

• Initiate coverage with BUY. We value the company at S$5.60/share, implying 15.6x 2022F earnings. Our valuation is at a premium to the Singapore peer average forward PE of 10.1x.

More direct competitors listed in the US and Japan trade at an average of 18.8x forward earnings.

STOCK IMPACT
• Expect revenue of S$720m in 2022 vs S$566m in 2021. AEM reported revenue of S$373.2m for 2H21, driven by the volume ramp-up for new-generation SLT handlers as well as burn-in testers, and the consolidation of CEI which was acquired in 1H21.

We believe 2H21 is the inflection point for test handlers to contribute more meaningfully to AEM going forward.

Assuming flat consumables and services sales, we expect 2022 full-year revenue to come in at S$720m – at the top end of the range guided by AEM.

• Target 19.8% pre-tax margin in 2023 from integration synergies. In 2019 and 2020, AEM’s cost of raw materials as a percentage of revenue averaged 60%. For 2022 and 2023, we assumed flat cost of raw materials (excluding CEI’s cost of sales).

We next assumed about 10% of these costs, or S$49m-54m of works, would be handed over to CEI and lead to cost savings based on CEI’s projected gross margin of 22% across the forecast horizon.

This led us to derive cost savings of S$10.8m in 2022 and S$11.8m in 2023.

Based on these assumptions, we derived a group-level pre-tax margin of 18.7% and 19.8% for 2022 and 2023 respectively.

EARNINGS REVISION/RISK
• None.

SHARE PRICE CATALYST
• Higher-than-expected revenue growth rates.
• Better-than-expected cost management.
• Earlier-than-expected integration synergies with CEI.


Full report here