For the period, they note that AEM’s revenue of $86 million was broadly in-line with expectations, but earnings came in below theirs and consensus forecasts.
They attribute the revenue decline to a decline in the company’s test cell solutions segment, with the pull-in of orders by its key customer into 4QFY2024 resulting in a 85% q-o-q decrease in test and automation equipment revenue to $11.4 million.
“This is partially offset by contributions from the high volumes of AMPS-BI manufactured for the new fabless AI customer and growth in associated test consumables, which contributed a 173% q-o-q increase in consumables sales to $30.8 million,” add Tan and Ling.
AEM’s contract manufacturing segment revenue also fell by 2.7% q-o-q, to which Tan and Ling point towards geopolitical uncertainty resulting in the life sciences, aerospace, oil and gas, and industrial segments reducing risks to mitigate volatility.
While tariffs and trade restrictions pose near-term uncertainty, AEM has reaffirmed its 1HFY2025 revenue guidance, citing stable demand visibility supported by three to six months of lead time.
Tan and Ling write: “Going forward, we believe that traction should continue into 2HFY2025, supported by new customer contributions and a stabilising industrial market, though tariffs could skew risks to the downside.”
Excluding the impact of product mix, the analysts expect margins for the rest of the year to hold steady, with R&D spend progressing as planned and selling, general, and administrative expenses benefiting from cost optimisation initiatives rolled out last year.
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In the 1QFY2025, revenue from AEM’s new customers more than doubled q-o-q, with new customers now contributing the majority of test cell solutions revenue for the period, surpassing that of the group’s key customer.
Although Tan and Ling see that the group is on-track to deliver triple-digit revenue growth from new customers, they understand that replicating historical margins from the FY2020 to FY2021 remains challenging in the near-term.
Notably, Intel’s current purchase order programme with the group, comprising 75% equipment and 25% consumables and set to run through 2H2FY2027, offers some baseline revenue despite the underutilised capacity.
On this, although Tan and Ling see that continued demand for older generation stock keeping units (SKU) may cap near-term consumables intensity due to lower thermal complexity, ultimately, they note that AEM’s relationship with Intel should continue to be a fruitful one, thanks to the expected ramp up of Intel’s 18A process in 2H2FY2025 leading to better demand.
They conclude: “We reduce FY2025/FY2026 revenue by 5%/4% to reflect downside bias from macro uncertainty. We also lower FY2025/FY2026 earnings by 28%/2% to account for lower margins due to lower-than-expected optimisation of selling, general, and administrative expenses as well as lower operating leverage.
As a result, they have reduced target price (TP) of $1.50 from $1.69 previously,
Maybank Securities’ (Maybank) Jarick Seet, on the other hand, is keeping his “sell” call and has also lowered his TP to $1.07 from $1.12, as he believes AEM is still in the early stages of transitioning to new customers.
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He writes: “We don’t expect any uplift possibly until 2HFY2025.”
Despite this, Seet notes that the long-term outlook for the company remains attractive, with management leaning on AEM’s differentiation in thermal technology, a critical enabler for testing AI and high performance computing (HPC) devices and chiplet-based advanced packages.
Of the listed tech players in Singapore, Seet still has Frencken Groupas his top pick.
He adds: “AEM is in the process of adding new customers to replace the lost revenue from its key customer. We expect this to take years to complete, and the global tariff situation is making the landscape even more challenging.”
Upside swing factors noted by him include revenue expansion from securing new customers or wallet expansion and increased orders from existing customers, synergistic and accretive acquisitions and finally, positive customer-related news that could catalyse improved orders for AEM.
Conversely, downsides include order cancellation, delays and earnings misses, emerging technology from rivals that could erode AEM’s competitive position with costumes and lastly, an erosion in competitive advantages of its core customer.
UOB Kay Hian (UOBKH) analyst John Cheong, like Seet, has maintained his “sell” call on the company, but at an unchanged TP of $1.09.
He writes that while AEM’s earnings in the quarter met 22% of his full-year estimate, its net margin continues to remain weak, at only 3.9%, which he believes is due to the lack of operating leverage and higher upfront costs incurred for new products before entering mass production.
The main share price catalyst noted by Cheong is if AEM posts a positive surprise in future revenue guidance and if it wins more new customers.
Shares in AEM closed 2 cents lower or 1.59% down at $1.24 on May 16.
