AEM: On track for record FY20 net profit -- and new machine production ramp

AEM executive chairman Loke Wai San speaking on a 3Q20 earnings call:  • On AEM's next generation handlers for key customer (Intel): "We're positive in terms of developments and look forward to a 2021 production ramp. We're feeling good about the results coming back in terms of the performance of our tools." • On System Level Tests: "Heterogeneous packaging is now being widely recognized as the next key area to focus on. With that, system level tests are being accepted. There’s quite a lot of interest from other customers. It’s early days in their engaging with AEM on system level tests. Given that it's now widely accepted, we expect competition from top players who are looking squarely at this as a high growth area. We have been doing this since 2002 -- we have one of the world's largest customers as reference and I'm positive about our ability to compete."

Excerpts from CGS-CIMB report

Analyst: William Tng, CFA

9M20 net profit in line with our expectations
AEM provided its 3Q20 business update yesterday. 9M20 revenue beat expectations at 89% of our and Bloomberg consensus full-year expectations.

9M20 net profit was in line at 80% of our full-year expectation but ahead of Bloomberg consensus at 88%.

Cash at endSep 2020 was S$129.8m and net asset value per share was S$0.703. AEM raised its FY20F revenue guidance again to S$500m-520m from S$480m-500m.

FY21F expectations
We think AEM’s FY21F outlook will be shaped by increased complexity in semiconductor chips, leading to increased testing.

In the Intel business, we believe AEM remains the sole supplier and its new test handler product should see higher shipment volume next year.

Given that AEM’s test handlers will reach its fourth year mark in shipments to Intel, there could be a need to replace some of the consumables used in the machines, leading to an increase in orders of consumable for AEM.

AEM’s efforts in growing its presence in the system level test market continues and if successful, over the next one to two years, AEM’s contribution from this segment could increase.

In May 2020, AEM announced a cooperation with United Test and Assembly (UTAC, unlisted) to co-develop new test systems for image sensor chips.

We think AEM could be on track to ship some equipment to UTAC by 2H21F.

Reiterate add
We raise our FY20F revenue to S$520.2m factoring in the latest FY20F revenue guidance of S$500m-520m.

Net profit forecasts are unchanged for FY20F as pretax margins were unchanged at 18.5% in 3Q20 (2Q20: 18.5%).

We assume that the impact of the S$20m revenue increase is offset by lower gross material margin and higher operating expenses as AEM absorbs more of the engineering cost in developing the test handlers in return for the right to the intellectual property developed in the process.

Note that AEM did not disclose the full income statement.

William Tng, CFA.We reiterate our Add call and TP of S$4.63, based on Gordon-Growth derived P/BV multiple of 6.09x (unchanged). Re-rating catalysts are FY21F revenue guidance which we think AEM will issue in early-2021. Downside risks are delivery delays due to lockdowns/movement restriction extensions and loss of competitiveness by its key customer.

Full report here