Strong growth momentum with back-end investments will propel AEM Holdings going forward, says DBS Group Research analyst Ling Lee Keng.
“AEM’s weaker FY2021 results as compared to the previous year were in contrast with the semiconductor industry which registered strong growth in 2021. With AEM’s next generation handler in mass production, we can look forward to better growth ahead,” writes Ling.
In a Feb 25 note, Ling is maintaining “buy” on AEM with an unchanged target price of $6.04, representing a 50% upside.
AEM is a solutions provider for the back-end testing of the semiconductor manufacturing process. It works closely with its key customer, Intel, to design, engineer, and manufacture the test handlers. AEM then provides field support and post-sales replacements.
Revenue for 2HFY2021 jumped 52.2% y-o-y, following a strong uptake of its new generation equipment and tools, while net profit for 2HFY2021 increased by 47.5% y‐ o‐y to $62.4 million.
For FY2021, net profit was down 6% y-o-y to $92.1 million but still 8% above Ling’s expectations. FY2021 revenue was also higher than the group’s guidance in November 2021 of between $525 million and $550 million.
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Ling expects “robust earnings growth” of 35% in FY2022, followed by another 11% in FY2023.
In the semiconductor industry, investments in frontend equipment typically leads the back-end by several quarters, says Ling. “Based on our analysis, AEM’s revenue has historically lagged Intel’s capex by about seven quarters. Hence, we believe that this will be a key driver of AEM’s growth from FY2022 and beyond.”
The semiconductor industry remains strong, writes Ling. The latest data print from Semiconductor Equipment and Materials International (SEMI) showed that the US semiconductor equipment billings increased by 46.1% y-oy to US$3.92 billion ($5.30 billion) in December 2021.
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The average monthly y-o-y growth recorded in 2021 was 44.5%, up from 23.0% in 2020. In the past five years, this data series has had a strong correlation with AEM’s share price, with an r-squared of 0.76, notes Ling.
The continued growth in the demand of semiconductor chips for mission critical applications, along with the increased adoption of advanced heterogeneous packaging, is driving the need for System Level Testing (SLT), writes Ling.
According to VLSI Research, SLT is expected to grow 4.4 times faster than wafer sort and functional test in 2020-2024, largely driven by the need to increase test coverage reliability. “This uptrend is expected to drive the growth momentum for AEM, especially with timely launch of the new generation equipment and tools,” says Ling.
Likewise, Maybank Research analyst Gene Lih Lai is recommending investors "buy" AEM with a raised target price of $6.34 from $6.23 previously.
"2HFY2021 results and industry fundamentals support our view that AEM is early in the current earnings cycle," writes Lai in a Feb 27 note.
"In our view, key risks include unexpected worsening of supply-side problems due to Covid-19. Currently, we do not expect the Russian-Ukraine conflict to alter AEM’s customers’ capex plans. Longer-term, a risk to our view is if chip oversupply tempers customers’ capacity addition plans," Lai adds.
As at 11.23am, shares in AEM are trading 10 cents lower, or 2.37% down, at $4.11.
Photo: Samuel Isaac Chua/The Edge Singapore
