SINGAPORE (Apr 30): Analysts are mostly positive on AEM Holdings following the group announcing its results update on Apr 28.

In its 1Q20 update, the group reported earnings surged 449% y-o-y to $43.8 million, booking its “best quarter on record”. This came on the back of a 179% increase in revenue to $146.8 million from $52.7 million in 1QFY2019, due to increased orders from its main customer, Intel.

See: AEM books 'best quarter on record' as earnings surge 449% to $43.8 mil

The Edge Singapore spoke to Chandran Nair, group president and soon-to-be CEO of AEM, who forecasted record sales for 1H20.

See: AEM says record sales forecast for 1H20 intact on buoyant demand

However, AEM has guided that 2Q20 revenue may fall q-o-q due to a reduced workforce as social distancing measures kicked in during the quarter, but revenue should catch up in 3Q20.

CGS-CIMB Research is reiterating its “add” recommendation on AEM with an increased target price of $3.10 from $2.71 previously.

In a Wednesday report, analyst William Tng says, “We believe the shift to telecommuting, work-from-home and virtual learning (due to Covid-19) which has created an increase in demand for semiconductor chips for servers, PCs and notebooks is here to stay. This, in addition to the industry becoming increasingly aware of the significance and benefits of system-level testing to test more advanced chips will be a boon for AEM.”

The long-term outlook for AEM is positive and Tng expects the group’s Hybrid Test Handlers to see more deliveries in FY21.

Maybank Kim Eng shares similar sentiments as it is keeping its “buy” call on AEM with a target price of $3.18 from $2.82 previously.

In a Wednesday report, analyst Gene Lih Lai says, “As management appears confident of achieving its FY20 revenue guidance, we raise our estimate to the top end of guidance. We believe current order book would have grown from the $338 million in Feb 2020 as demand drivers are intact, and that AEM is a beneficiary of the customer’s expanding wallet size.”

But the key risk for FY20 is further supply-side disruptions, although various government-mandated movement restrictions have not resulted in material impact thus far.

As for FY21, Lai is concerned about a likelihood of high-base effects from FY20, and the risk that Intel could normalise capex.

“We believe this is alleviated as management continue to view that structural and technology drivers for AEM’s products (e.g. more complex chips require increased testing, therefore more equipment are needed to maintain throughput) may be more dominant than cyclical factors (e.g. capex fluctuate depending on supply chain inventory levels),” says Lai. Intel is expecting its first 7nm chip and Foveros 3D-stacked chip in 2021.

Additionally, the analyst expects new accounts, such as from the memory customer and Huawei to contribute to growth as well.

On the other hand, DBS Group Research may be “overall positive on AEM” but it has downgraded its call to “hold” from “buy” but with an increased target price of $2.47 from $2.29 previously.

In a Thursday report, lead analyst Ling Lee Keng says, “We are still overall positive on AEM based on several favourable developments in the industry (spike in demand for server chips and notebooks) and its key customer (improvement in yields in its 10-nm chips and maintaining capacity expansion plan of 20%).”

However, the downgrades comes on the back of a limited upside to the research house’s revised target price and the uncertain economic backdrop.

“We are more cautious on the outlook given the uncertainty surrounding the COVID-19 pandemic,” says Ling.

As at 3.05pm, shares in AEM are trading at 5.06% higher at $2.49 or 3.5 times FY20 book with a dividend yield of 2.7%, according to DBS' estimates.