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DBS reminds AEM investors not to 'lose sight of the bigger picture' as it maintains 'hold' call despite new customer win

The Edge Singapore
The Edge Singapore  • 3 min read
DBS reminds AEM investors not to 'lose sight of the bigger picture' as it maintains 'hold' call despite new customer win
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Chip tester AEM Holdings AWX -

has announced it is winning new business after an unnamed fabless firm has chosen its thermal control solution for advanced system-level test insertions. 

As announced by AEM, this fabless provider is primarily in the high-performance computing and artificial intelligence space, and its testing services will be used for this customer's next-generation AI devices.

Initial deliveries is slated to commence within this current FY2024 ending December.

According to DBS Group Research in its April 22 note, the timing of the potential ramp hinges on the market’s receptivity to the new product and overall market demand. 

DBS had already anticipated more of such announcements as AEM guided for revenue from new test insertion wins to triple-digit millions in FY25. 

As such, its current earnings estimates has already factored in growth of new customer contributions at around 9% of revenue in FY2024, and to further improve by nearly 4x to $145 million the following year, or 23% of FY2025.

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According to DBS, AEM has won over five new customers: one in memory, two in processing units, and two in systems and so-called hyper scalers. 

DBS estimates high-single-digit growth in new customer contributions this year, albeit from a small base, which we believe will primarily comprise memory-related revenues given the upcycle in memory. 

DBS believes that contributions from new processing units and systems and hyper scalers customers will be relatively "minor" this year as they are currently at the production intercept stage. 

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"As such, we are of the view that the tide will not turn until FY2025 when processing units and systems and hyper scalers customers are expected to enter into the ramp stage," says DBS.

Thus, despite this latest customer win announcement, DBS has kept its "hold" call and $2.26 target price on this counter, urging investors not to "lose sight of the bigger picture" - that is, test spending from AEM's key customer, believed to be Intel Corp, remains uncertain.

According to DBS, Intel in the middle of last year announced it has identified an annual total savings opportunity of between US$4- 5 billion, with financial savings from tests estimated at US$500 million per year by eliminating non-standard tests. 

Citing a recent presentation from Intel, DBS observes that testing time for a next-generation client product is down 75%, raising the spectre that test times will decline across the board for AEM.

DBS figures that while AEM’s share of revenue from Intel could decline to around 45% in FY2024 and FY2025 from 50% in FY2023, it is still highly dependent on this key customer. 

AEM is currently trading at around 13x blended FY2024 and FY2025 earnings, and DBS does not expect the stock to rerate to 16-17x around mid-2022 when the ramp-up of new equipment for the key customer led to record profits that year.

"With no ramp-up of new generation equipment for the key customer in the next two years in addition to risks to test spend arising from the key customer’s expense discipline, we reiterate our 'hold' call on AEM with a $2.26 target price," says DBS. 

AEM shares closed April 22 at $2.32, up 1.31%.

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