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

Uma Devi
Uma Devi4/30/2020 07:00 AM GMT+08  • 7 min read
AEM says record sales forecast for 1HFY2020 intact on buoyant demand
Nair says the semiconductor industry is entering a new era of “highly complicated” multifunctional chips. If AEM can keep up with the industry shift, the company will be kept busy for the next five to seven years.
Font Resizer
Share to WhatsappShare to FacebookShare to LinkedInMore Share
Scroll to top
Follow us on Facebook and join our Telegram channel for the latest updates.

SINGAPORE (Apr 30): The prolonged Covid-19 outbreak has hurt vast swathes of the economy and even for those sectors not directly affected by the global lockdown, they are bracing for some form of disruption which could lead to lower sales.

However, AEM Holdings, the Singapore-listed provider of chip testing solutions, is hoping to benefit from the global lockdown. That is because what AEM manufactures enable people to work, study and collaborate with one another from different locations, says Chandran Nair, group president and soon to be CEO.

“I would not say that AEM is not going to be affected. But the markets that have the need for remote working and communications is what I’m focusing on,” Nair tells The Edge Singapore in an interview on March 23.

During the lockdown, Nair says for companies to function normally, they must be able to do three things. One, they must be able to communicate with staff and clients without being physically present. Two, staff in different countries must be able to collaborate on projects and they must be able to access to the most updated information regardless of where they are.

“The most successful companies are the ones that can help serve a need,” Nair tells The Edge Singapore in an interview on March 23.

“There is clearly a need for technology that is powered by semiconductors and software for collaborative tools, and those are the kind of chips that we are testing,” he adds.

See also: Asian startups are rising to the financing challenge

To set the record straight, AEM has not remained totally unscathed during the crisis. Like many tech manufacturing companies, AEM has to bear with disruptions along the supply chain. Nair estimates that some 30–50% of the group’s operations will have to be “dynamically shifted” as more countries impose travel restrictions and lockdowns. Nonetheless, the company remains “cautiously confident” that it will benefit from the increasing use of technology at work.

Record-high sales

For 1QFY2020 ended March, AEM reported a 449% surge in earnings to $43.8 million, making it the “best quarter on record” for the company. Revenue for the quarter edged out the company’s own guidance range of $135 million to $145 million, coming in at $146.8 million due to higher orders from its key customer Intel Corp.

See also: Meta to cut 10,000 jobs, eliminate 5,000 more vacant positions

AEM notes that the shift to telecommuting, as well as work-from-home and virtual learning arrangements created an increase in demand for semiconductor chips for servers, PCs and notebooks. As a result, AEM has declared a final cash dividend of 3.1 cents per ordinary share FY22019, up from 1.9 cents in FY2018.

In addition, AEM says its full-year sales guidance of $360–$380 million provided on Feb 25 remains intact. This is a rare piece of good news for stock investors who have been buffeted by wave after wave of negative news since the start of the Covid-19 pandemic.

While AEM’s full-year guidance remains unchanged, it expects some revenue in 2QFY2020 to be pushed back to 3QFY2020 due to the reduced workforce at its facilities.

“I always hesitate when I say this because in the outside world, things are changing very quickly. But based on what we know today, we are keeping to guidance,” stresses Nair.

Even with higher sales expected, AEM needs to keep an ever close watch on costs. “Like all companies, we continue to look at our expenses and supply chains, and at driving better manufacturing techniques to be more efficient,” says Nair.

Besides operational efficiency, AEM plans to offer a greater variety of services. “Initially we were considered a precision making/machine making company. But we have diversified into four segments,” says Nair.

“By pivoting on our strength in automation technology, we added other key technologies like test technologies, software and machine learning to meet the changing needs of the industry,” he adds.

At present, AEM’s four business segments are equipment systems solutions, system level tests and solutions, micro-electro-mechanical systems and tests and measurement solutions.

Nair says the semiconductor industry is entering a new era of “highly complicated” multifunctional chips. If AEM can keep up with the industry shift, the company will be kept busy for the next five to seven years.

Key customer

For about 18 years, AEM has been in partnership with US microprocessor giant Intel Corp, which according to research house KGI Securities, accounts for 80% of AEM’s sales as of October 2019. Apart from supplying processors for computer manufacturers such as Apple and Dell, Intel also manufactures devices related to communications and computing such as integrated circuits and embedded processors.

In a March 20 message to customers and partners, Intel CEO Bob Swan said the group is sustaining an on-time delivery rate of greater than 90%. And as far as FY2020 is concerned, it will be “business as usual”.

This is good news for AEM. “We expect Intel to maintain their capital expenditure guidance, even if sales weaken, in order to keep pace with Advanced Micro Devices’ (AMD) current technological prowess in the personal computing segment,” says KGI, referring to Intel’s challenger in the market.

“Recent data from the Steam Hardware Survey indicate a slight trend reversal to Intel’s favour, but it remains to be seen if Intel can truly improve production and performance of their latest 10nm chips,” it adds.

To be sure, the 10nm chips were the sweet spot for the semiconductor industry last year.

Amid its transition to the first iteration of its 10nm process technology, Intel reported record 4QFY2019 revenue of $20.2 billion, 8% higher than in 4QFY2018.

Although analysts remain wary about AEM’s single-customer concentration risk, Lai Gene Lih, analyst at Maybank Kim Eng says the demand-supply dynamics of Intel’s products remain favourable, and both Intel and AEM are unlikely to be “materially hindered” by Covid-19-related supply disruptions.

“Intel has a track record of being a good paymaster, with days of payables outstanding ranging 40–50 days, even throughout the global financial crisis (GFC),” notes Lai.

Mu-TEST, future acquisitions?

One way AEM has broadened its range of services is through inorganic growth. Last December, it acquired French semiconductor test solutions provider Mu-TEST for EUR7.5 million ($11.5 million). AEM says Mu-TEST’s customisable low-cost tester capabilities would not only complement its own, but also allow it to offer complete system level test solutions for the industry.

While Nair says Mu-TEST operations have quickly been integrated with AEM’s, the positive financial impact of the acquisition is expected to be seen only from 18 to 36 months after the deal’s completion.

“The acquisition was an important part of our future growth strategy and has given us an important tech block required for the testing of semiconductors, or system level tests,” says Nair.

“Mu-TEST not only gives us the ability to have effective semiconductor testers at a very reasonable price but also enables us to bring system level tests to the market effectively,” he adds.

Meanwhile, AEM is already on a lookout for its next potential acquisition. “While we have the core tech blocks required to take us forward, we are continuously on the lookout for more because technology changes very quickly,” says Nair.

“While we’re optimistic based on how technology progresses, if there’s something there for us to take advantage of, or if there’s something that can help us to complete our production portfolio, we’ll be open to that,” he adds.

Growth company

Over the past five years, AEM’s share price has surged over 30 times to close at $2.18 on April 28.

As the Covid-19 pandemic rages on, AEM shares have risen by just 1% since the start of the year. Still, Nair remains unfazed, and is quick to insist that the volatility does not reflect the fundamentals of the company. “Does it bother me? Yes, but only to the extent it bothers me that the whole market is being so volatile,” he adds.

For now, Nair would rather prepare himself and the company for the post-Covid-19 when the uncertainty and panic have subsided. “When the situation comes to a more normal one, we believe we’re well poised to ensure growth and profitability which is basically what investors are looking for,” he adds.

Looks like this new CEO will have his job cut out for him.

Loading next article...
The Edge Singapore
Download The Edge Singapore App
Google playApple store play
Keep updated
Follow our social media
Subscribe to The Edge Singapore
Get credible investing ideas from our in-depth stock analysis, interviews with key executives, corporate movements coverage and their impact on the market.
© 2022 The Edge Publishing Pte Ltd. All rights reserved.