The drop in revenue, as described by AEM, was due to a decline in its 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.
The company’s contract manufacturing segment revenue also fell by 2.7% q-o-q, no thanks to customers trimming orders amid a more volatile environment. On the other hand, AEM enjoyed higher revenue from consumable sales.
Earnings, in the same period, was up 43% y-o-y but down 71% q-o-q to $3 million – lower than expected no thanks to weaker margins.
Malaysia's EPF, one of the largest AEM shareholders, has further trimmed its stake following the 1QFY2025 business update. On May 13, it sold nearly 1.8 million shares for around $2.18 million, or just over $1.21 per share. This follows an earlier sale on May 7 when EPF sold one million shares for $1.17 each. With the May 13 sale, EPF is left with around 24.37 million shares, or 7.782%.
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Staying optimistic, DBS Group Research’s Amanda Tan and Ling Lee Keng kept their “buy” call on the stock as they believe in an eventual albeit delayed turnaround for the company.
They note that 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.
“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,” state Tan and Ling.
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Excluding the impact of product mix, the DBS 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.
There is growing momentum from new customers. In 1QFY2025, orders from them more than doubled q-o-q. The new customers now contribute the majority of test cell solutions revenue for the period, surpassing that of AEM’s long-time key customer, Intel.
Tan and Ling believe that AEM is on-track to deliver triple-digit revenue growth from new customers. However, they warn that replicating historical margins from the FY2020 to FY2021 remains challenging in the near-term.
Notably, Intel’s current purchase order programme with AEM, comprising 75% equipment and 25% consumables and set to run through 2H2FY2027, offers some baseline revenue despite the underutilised capacity.
Although Tan and Ling see that continued demand for older generation stock keeping units 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.
"With the customer validation and our commitment to R&D in thermal leadership, I am confident in the promising future of our new customer engagements as we enable their technology roadmap for testing advanced packages," says CEO Amy Leong.
Meanwhile, the DBS analysts have reduced their FY2025 and FY2026 earnings projections by 28% and 2% respectively on slightly lower revenue and lower-than-expected optimisation of selling, general, and administrative expenses as well as lower operating leverage. As a result, they have reduced target price of $1.50 from $1.69.
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UOB Kay Hian’s John Cheong remains bearish on this counter. He has kept his “sell” call along with an unchanged target price of $1.09.
AEM’s 1QFY2025 earnings met 22% of his full-year estimate, but he points out that the company’s net margin, at just 3.9%, remains weak, 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. Meanwhile, Cheong values the stock by applying 15x earnings multiple, which is the historical trough, to derive his target price of $1.09.
Maybank Securities’ Jarick Seet, on the other hand, is not only keeping his “sell” call. He has also lowered his target price to $1.07 from $1.12, as he believes AEM is still in the early stages of transitioning to new customers. “We don’t expect any uplift possibly until 2HFY2025.” Of the listed tech players in Singapore, Seet still has Frencken Groupas his top pick.
Despite this, Seet believes 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 devices and chiplet-based advanced packages.
“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,” says Seet.
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, says Seet.
Shares in AEM closed 2 cents lower or 1.59% down at $1.24 on May 16.
