• Following AEM's 1Q2023 results, CGS-CIMB retained its optimism about the company (see excerpts below).

• But UOB Kay Hian figured that the near-term outlook is uncertain and set a $2.87 target price for the stock. Note that this target price is an upward revision from its previous S$ 2.78 target.


• Similarly, Maybank KE is downbeat about AEM, and has a sell call with a $2.72 target. Again, this is an upward revision from its previous $2.66 target. 


Excerpts from CGS-CIMB report

Analyst: William Tng, CFA & Izabella Tan

AEM Holdings Ltd -- Recovery delayed, but outlook still bright

■ 1Q23 revenue of c.S$152.7m was c.12.8% above our S$135.4m forecast due to a 52% yoy increase in services revenue (which includes CEI).

AEM 

Share price: 
$3.38

Target: 
$3.86

■ 1Q23 net profit of c.S$15.6m was c.13.6% below our S$18.0m forecast. Net profit margin declined 5.4% pts yoy to 10.2% in 1Q23 (vs. 15.6% in 1Q22).

■ AEM maintained its S$500m revenue guidance for FY23F, though this may be guided downwards. We reiterate Add with an unchanged TP of S$3.86.


overview1.21

1Q23: revenue beat expectations, but net profit missed


AEM Holdings’ 1Q23 revenue of c.S$152.7m (+23.2% qoq; -41.7% yoy) came in at 22.6%/25.3% of our and Bloomberg consensus’ full-year forecasts.

Note that AEM recorded exceptionally high revenue of S$261.8m in 1Q22 due to a volume ramp-up to support its key customer’s new platforms; said ramp-up started to taper in 3Q22.

1Q23 net profit of S$15.6m (+35.3% qoq; -61.8% yoy) came in below, at 17.3%/18.3% of our and Bloomberg consensus’ full-year forecasts.

Net profit margin declined 5.4% pts yoy to 10.2% (1Q22: 15.6%).

In our view, this is due to a change in revenue mix, with services (including lower-margin contribution from CEI) accounting for c.54% of 1Q23 revenue (vs. c.21% in 1Q22), as well as continued R&D spend for other customers in an effort to develop these accounts and likely other non-operational costs (detailed financials will only be available when 1H23F results are released in Aug 2023).

 

 Recovery expectations seems delayed – risk of order pull-back

 

Next generation

AEM’s System Level Test (SLT) offerings are now gaining customers’ confidence, and we think that some of these customers could offer growth opportunities as their next generation products are high volume products that would require SLT.”

-- CGS-CIMB

In its 1Q23 business update, management said that it has limited visibility into 2H23F, though it sees slight positive signs of inventory reduction in the industry.

Management now hopes that inventory corrections would conclude between late-FY23F and early-FY24F. It also noted that there might be a risk that its current FY23F revenue guidance of S$500m may be revised down when 1H23F results are released.

In our view, this could be due to possible order pull-backs by AEM’s customers hinging on market conditions going into 2H23F.

However, we note that the longer-term outlook remains positive as AEM’s System Level Test (SLT) offerings are now gaining customers’ confidence, and we think that some of these customers could offer growth opportunities as their next generation products are high volume products that would require SLT.

Given the outlook of a delayed recovery, we reduce our FY23-24F revenue forecasts by 1.3-11.0%, leading to 2.2-29.9% reductions in our EPS forecasts.

 Reiterate Add, with an unchanged TP of S$3.86

 
williamtng4.14William Tng, CFA.Our TP is based on 9.7x CY24F P/E, 5-year average.

We maintain our Add call on a potential FY24F net profit recovery (+94.86% yoy in our estimates).

Re-rating catalysts are stronger-than-expected orders from its major customer and earlier-than-expected success in securing orders from other potential customers.

Downside risks are delivery delays and the loss of its sole supplier status for its major customer, which would negatively impact AEM’s profitability, in our view.


Full report here

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