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More analysts issue downgrades on AEM

Felicia Tan
Felicia Tan • 5 min read
More analysts issue downgrades on AEM
Analysts from Citi, DBS and Maybank have "hold" calls on AEM. Photo: AEM Holdings' website
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More analysts have issued downgrades for AEM Holdings AWX -

. Citi Research and Maybank Securities have both downgraded their calls to “neutral” and “hold” respectively from “buy” previously.

“With the ramp-up of AEM’s new customer contracts still a work in progress and visibility pushed out, we downgrade the stock to ‘neutral’,” says Citi analyst Luis Hilado.

The analyst has also lowered his target price to $2.13 from $3.78 despite his earlier report noting “good news” for AEM’s FY2025 performance after its “weak” set of results for the 1QFY2024.

The new target price, which is set at a 50% discount to AEM’s global peers, is now based on an unchanged 12 times earnings per share (EPS) average for FY2024 – FY2025.

“We expect FY2024 to remain cloudy and hence cut our FY2024 – FY2026 revenue and recurring profits by 17% - 36% and 34% - 61%, respectively,” adds Hilado. “Consensus will follow, in our view.”

At this point, Hilado sees limited upside to AEM’s share price until a turnaround becomes more apparent. At the same time, downside is also limited but by low valuations and upside risks in FY2025.

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Maybank analyst Jarick Seet’s downgrade comes as he sees that it’s “not time yet” for investors to buy into the counter.

“Despite thinking the worst is over, and expecting more new order wins in the next few months, we think it’s better to revisit AEM closer to 4QFY2024 as the bulk of the ramp-up orders will only likely come in FY2025,” he writes.

“We were too optimistic of a much stronger 2HFY2024 based on potential order recovery from its key customer as well as ramp up of recently unveiled new orders. However, management updated that the new orders will only start mass production at end-FY2024 and the main surge will only come in FY2025. It also only expects an uptick in growth in 2025,” he adds.

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Even though AEM’s quarterly earnings of $2.3 million stood in line with Seet’s forecasts, the analyst has lowered his FY2024 – FY2025 patmi estimates by 31.8% and 21.6% respectively to “reflect the new reality”. His target price has also been lowered to $2.04 from $2.78 previously, pegged to 11 times blended P/E for FY2024 and FY2025.

DBS Group Research analysts Amanda Tan and Ling Lee Keng have maintained their “hold” call but with a lowered target price of $1.97 from $2.26. “Our target price is pegged to 14 times FY2024/FY2025 earnings, slightly below - 0.5 standard deviation (s.d.) of the historical mean,” say the analysts.

AEM’s 1QFY2024 revenue stood in line with their estimates, accounting for 23% of their full-year forecast while its earnings fell below expectations, making up 11% of the analysts’ full-year estimates.

However, they remain optimistic as they recommend investors not to “lose sight of the bigger picture”.

“[There is] traction in new customers picking up, but test spend of key customer remains uncertain,” they write.

“We are positive about AEM’s momentum with new customers with the guidance for new test insertion revenue to grow more than five times to triple-digit millions in FY2025, which AEM believes is a blended high-confidence estimate that is based on confirmed and soon-to-be confirmed orders,” they add.

While AEM is expected to experience some growth from its expanding customer base, Tan and Ling think it is too early to factor in any potential for AEM to repeat the success it saw with its key customer with its new customers.

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Meanwhile, the analysts estimate that AEM’s share of revenue from Intel could decline to 46% in FY2024 and 37% in FY2025 from 50% in FY2023 after Intel announced that it intends to eliminate non-standard tests in a bid to save costs.

Intel’s new reporting structure also showed that test times for a next-generation client product is down by 75%, which contrasts with Tan and Ling’s expectations that test times could remain resilient since it is usually elongated during node migration.

“This will be the key risk for AEM under the assumption that test times will decline across the board for Intel’s product portfolio,” they write.

However, the analysts believe that the growing share of artificial intelligence (AI) personal computers  (PCs) worldwide, from 10% in 2023 to 58% by 2027, should be a mitigating factor, given the higher test intensities required for AI-related chips.

“Despite the near-term gloom, we remain positive on the longterm outlook on AEM, buoyed by secular trends in the semiconductor test markets and growth in revenue from new customers. AEM sees a serviceable obtainable market (SOM) of US$1.3 billion or $1.76 billion (22% of the serviceable addressable market), with system-level test (SLT) and full-time (FT) handlers accounting for [over] 60% of the SOM,” they write.

In addition to their lowered target price, the analysts have lowered their revenue forecast for FY2024 and FY2025 by 5% and 4% on AEM’s weaker-than-expected results in contract manufacturing and slower recovery at the key customer. Their FY2024 and FY2025 earnings estimates have also been lowered by 30% and 19% respectively mainly due to lower operating leverage and sub-optimal utilisation.

As at 9.26am, shares in AEM are trading 1 cent lower or 0.5% down at $2.01.

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