SINGAPORE (May 8): AEM Holdings surged 19.4% to close at $3.08 on May 8, after the company raised its revenue guidance and a flurry of analysts’ upgrades followed.

On May 6, the company raised its revenue guidance for FY20F to $430 million to $445 million from $360 million and $380 million. 

In the same statement, AEM Holdings also estimated a higher order book for delivery in FY20F to $416 million, a 23% increase from its previous $338 million. AEM Holdings also booked its “best quarter on record”, primarily due to increased orders from its key customer, Intel.

Intel itself is working on a new generation of desktop processors that are expected to be available in May, as well as exploring the possibility of expanding its capex to increase fab space amongst other future plans.

In response to AEM’s revised guidance, brokerages following this stock have raised their target prices. 

CGS-CIMB and Maybank Kim Eng have also increased their FY20F earnings estimate by 12.5% and 14.9% respectively. CGS-CIMB has a revised target price of $3.58, up from $3.10, while Maybank Kim Eng sees AEM as worth $4.04, up from $3.18 earlier.

DBS Group Research, on the other hand, expects FY20 earnings to increase by 18%, and is maintaining its “hold” call, but with a higher target price of $2.87, from $2.47 previously. 

See also: The chips are down, but not for long, where analysts remain upbeat on the prospects of the semiconductor industry

To be sure, the revised guidance is not a big surprise to all three brokerages - they expect AEM Holdings to meet their targets, or exceed expectations, barring a prolonged period of lack of sales and further market uncertainty due to the Covid-19 pandemic.

CGS-CIMB analyst William Tng says “The new guidance does not surprise us as we already highlighted this possibility in our previous note dated April 29,” in his Thursday report.

Maybank Kim Eng analyst Lai Gene Lih views the new guidance as “highly achievable”, but remains cautiously optimistic in the event of a “government-mandated factory shutdowns in 2H20”, or an expected second “spread of Covid-19 in Singapore and Malaysia, where AEM Holdings’ production and supply chains are primarily located”.

DBS analyst Lee Keng Ling is also aware of the challenges that could face AEM Holdings’ numbers despite its “track record of four upward revisions in sales guidance last year”, and a “spike in demand for server chips and [computer] notebooks”.

See also: AEM says record sales forecast for 1HFY2020 intact on buoyant demand

“We prefer to err on the side of caution amid the weak economic backdrop caused by the COVID-19 pandemic”.

On the other hand, not all semiconductor companies are made equal.

On May 8, CGS-CIMB, while keeping its “add” or “buy” call, has lowered its target price on UMS Holdings to 94 cents, from $1.08. This is primarily due to the stoppage and subsequent resumption with minimal workforce in its production activities owing to the movement control order in Penang, Malaysia, where 78% of UMS’s total production capacity is.

KGI Securities, meanwhile, has initiated coverage on UMS Holdings with an “underperform” or “sell” recommendation, and a target price of 67 cents, representing a total downside of 18% for the stock.

See also: 3 tech stocks to cash in on and 2 to sell as Covid-19 outbreak drags on: Maybank  https://www.theedgesingapore.com/capital/brokers-calls/3-tech-stocks-cas...

The way KGI analyst Kenny Tan sees it, growth in semiconductor capital equipment sales – which makes up the bulk of UMS’s business portfolio – is expected to be slow after a “cyclical contraction in 2019”, and increased competition in deposition equipment sales.

 “Deposition equipment sales were expected to fare worse than the fab industry, even prior to COVID-19 crisis. We think this could shape out to be a second weak year for deposition equipment, despite initial strong forecasts from UMS’s key customer,” says Tan in his Monday report.

While 2019 saw an overall growth uptick, estimates for 2020 remains to be seen. Deposition equipment is also on the decline, with a 19% drop in sales y-o-y in 2019, followed by another 5% dip in sales in 2020.

“Given that the -5% forecast was made in December 2019, we think there could be further downside given the developments of COVID-19 since,” Tan adds.

UMS Holdings’ key client Applied Materials (AMAT), the market leader in deposition equipment, has been losing its market share to other deposition players. This could affect the group’s sale to AMAT for its Endura deposition system, should market demand fall.

UMS Holdings’ recent diversification into the aerospace sector also comes at a bad time due to the airline industry being severely affected by the Covid-19 pandemic. The damage may also have a negative impact on SME suppliers such as UMS’s associates JEP Holdings and All Star Fortress.

 The business is predicted to be further impacted by “continued de-globalisation” with resurfacing underlying trade tensions, which sees the US tightening export controls restrictions – including the semiconductor industry – to China.

For 4QFY2019 ended December, UMS Holdings reported earnings of $9.2 million, a 4% dip from earnings of $9.4 million a year ago. This comes despite a 56% increase in revenue as a change in product mix resulted in lower margins for the group.  

KGI Securities has forecasted the group’s profit after tax and minority interests (PATMI) to be at $32.9 million for FY2020.

CGS-CIMB’s Tng says that the brokerage has cut UMS’s FY20-22F’s earnings per share (EPS) by 0.4% to 12.4% on the back of halted production lines, and poorer performance from UMS’s aviation-related associate, JEP.

Despite the downgrades, UMS Holdings shares on May 8 closed at 79.5 cents, up 1.3%.