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Analysts remain confident on AEM following strong results

Lim Hui Jie
Lim Hui Jie • 5 min read
Analysts remain confident on AEM following strong results
Analysts have maintained their “buy” and “outperform” ratings on AEM after 'record' 3Q20 results.
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Analysts from DBS Group Research, Maybank Kim Eng and KGI Securities have maintained their “buy” and “outperform” ratings on AEM and target prices of $5.16, $5.05, and $5.26 after the company announced a spike in both revenue and earnings for 3QFY2020.

On Nov 3, AEM announced 3QFY20 revenue of $161.8 million on the back of increased orders for tools, consumables, and services, a jump of 93% y-o-y. It elaborated 74% of total revenue came from tools and machines, while revenue from consumables and services accounted for 26% of total revenue.

For 3QFY2020, profit before tax amounted to $29.9 million and net profit of $24.3 million, a jump of 80.4% and 77.4% respectively.

AEM reported for the nine months in 2020, profit before tax stood at $97.2 million and net profit at S$79.6 million.

Diluted earnings per share also increased from five cents in 3Q2019 to 8.9 cents in 3Q2020.

With the strong 3Q2020 results, the Group is raising its FY2020 revenue guidance to be between $500 million to $520 million based on the sales order visibility and business outlook, and capital expenditure (capex) for FY2020 is projected at about $5 million.

Furthermore, AEM will also continue to focus more effort in research and development (R&D). R&D expenditure in 4Q2020 is expected to be $2 million to support new projects for future years.

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The company said it will also continue to “expand strategically through mergers and acquisitions”

This is as it “solidifies its position as a global leader” offering application-specific intelligent system test and handling solutions for semiconductor and electronics companies serving advanced computing, 5G and AI markets.

In a Nov 6 note, DBS Group Research’s Chung Wei Le and Ling Lee Keng raised their target price of $5.16 from their previous figure of $4.96.

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They believe AEM is in a “strategic position” to benefit from its key customer and industry uptrend. It is trading at 9.2x FY21F PE, which is undemanding to its peer average of 19.9x.

In addition, they said the semiconductor industry momentum remains strong, and highlighted the fact that industry associations are forecasting an accelerated growth for semiconductors in 2021, with US semiconductor equipment billings increasing 40.4% y-o-y in September.

KGI Securities’s Tan Jiunn Chyuan also raised his target price from $4.78 to $5.26, said the 3QFY20 revenue figure was AEM’s “highest ever quarterly revenue”.

They noted sales mix was largely skewed to tools and machines in 3Q20, at a 75/25 split. While about 15% profit margins in 2Q20 were attributable to increased R&D spend and reduction of non- recurring fees from customers, 3Q20 margins were more of a result of the product mix.

Going forward, given the $2million in R&D expenditure announced by AEM just for 4Q20, they expect margins to come in similar to 2Q and 3Q.

Tan also highlighted that despite a capex cut in key customer Intel, they remain “fairly confident” that AEM can continue growing their wallet share with them.

Given the new revenue guidance of $520 million, Tan said implied 4Q20 sales are ranging from $65 to 85 million, which is below the $88.8 million in 4Q19.

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As such, he adjusts his FY20F revenue estimates above the higher end of guidance, at $525 million, after revising up HDMT sales estimate and cutting back estimates from the 3 smaller businesses.

“Our revised profit margin forecast is at 18%/17.7%/17.8% for FY20/21/22 respectively. We estimate FY21F sales to be at S$579mn, about +10% YoY and above consensus.” he concludes.

Meanwhile, Maybank Kim Eng’s Gene Lih Lai is the only analyst to maintain an unchanged target price of $5.05, but said that the 3Q20 figures “was ahead of our and consensus expectations.”

He also said AEM remains positive on long-term growth prospects, and added the rollout of 5G enables increased complexity in mission-critical applications.

This has resulted in unprecedented challenges in chip testing. Heterogeneous packaging is also becoming mainstream, as traditional Moore's law scaling faces limitations.

VLSI Research expects system level test (SLT) to grow 4.4x faster than wafer sort and functional test in 2020-24, as SLT is beneficial in overcoming limitations of current design-for-test techniques, which leave millions of transistors untested.

He also said AEM expects seasonality patterns to normalise to 2Q/3Q being peak quarters, and 1Q and 4Q being lulls in any given year.

This contrasts what was observed in 4QFY19/1QFY20, where these were the strong quarters within 2019/2020 respectively.
As such, Gene said this normalisation may imply difficult y-o-y revenue comparisons in 4Q20/1Q21. As teh stock price has risen by 125% in the last twelve months, “we see risks of lacklustre share price performance until Jan-21 when FY21 revenue guidance is provided, and this may provide opportunities for investors to accumulate on dips.” he thinks.

Gene also warns a key risk is that if Intel faces steeper than expected market share loss, which may temper the pace of equipment orders to AEM.

As at 1.36pm, shares of AEM were trading at $3.55, with a FY20 price to book ratio of 4.7% and dividend yield of 2.4%

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