AEM: In bear market despite analysts’ positive calls. What gives? 

AEM is a global leader in test innovation, providing comprehensive semiconductor and electronics test solutions based on the best-in-class technologies, processes, and customer support. AEM has a global presence across Asia, Europe, and the United States. With manufacturing plants located in Singapore, Malaysia (Penang), China (Suzhou), and Finland (Lieto), and a global network of engineering support, sales offices, associates, and distributors, they offer their customers a robust and resilient ecosystem of test innovation and support.

AEM is listed on the main board of the Singapore Exchange with its head office located in Singapore.

Investment merits

• Analysts are bullish with average potential capital upside of around 58%!

Based on Bloomberg’s compilation, the average analyst target price is around $6.72, representing a potential capital upside of around 58% from its closing price $4.25. Even if I exclude CGS-CIMB’s street high price target $7.90 for prudence, the other two analysts’ target prices are at least $6.00.

AEM is one of CGS-CIMB’s conviction buy calls. In fact, CGS-CIMB issued four analyst reports on AEM just in January alone! Please click HERE for the analyst reports.

Based on reports, Intel is expanding aggressively in various geographies. Based on the edgemarkets (click HERE for the article dated 14 Dec 2021), Penang chief minister Chow Kon Yeow said that Intel will invest approximately US$7b in Penang to advanced semiconductor packaging technology. It is common knowledge that Intel is AEM’s largest customer and AEM has a manufacturing plant in Penang hence it is likely that AEM may benefit from Intel’s expansion.

In an analyst report dated 10 Jan 2022, CGS-CIMB pointed out that AEM benefited to some extent (clocked record revenue and net profit in FY20) as Intel bought equipment for its additional US$475m investment in its Vietnam test and assembly facility which was announced in Jan 2021.

Besides Penang, Intel has made a couple of noteworthy announcements. On 24 Sep 2021, Intel announced a US$20b investment for two new fabs in Arizona. Subsequently, it announced on 21 Jan 2022 that it has plans to build two new fabs amounting to an approximate US$20b in Ohio, USA.

• FY22 likely to be stronger than FY21F even with margin compression

In AEM’s 3QFY21 business update, the sequential growth in top and bottom lines was driven by the volume ramp for their next generation system level testing handlers and peripheral tools. AEM expects the ramp to continue through 4Q2021 and into FY2022.

AEM announced on 10 Nov 2021 FY21F revenue guidance of S$525m - S$550m. AEM subsequently announced on 11 Jan 2022 that it expects FY22F revenue to be between S$670m to S$720m, albeit with some margin compression in view of higher supply chain costs and an increase in R&D spend as they engage customers on new projects.

You may agree that AEM is typically conservative in its guidance. AEM has raised its revenue guidance once in 2021 from S$460m – 525m to S$525m – 550m, and four times in 2020 from S$330m – 350m to S$500m – 520m. Even if we assume there is no upwards revision in its FY22F guidance, if AEM can generate S$720m in FY22F revenue, this represents a 31% year on year increase from its top end guidance of S$550m FY21F revenue.

• New customer wins may have meaningful contribution in 2HFY22F and beyond

Based on AEM’s 3QFY21 business update, AEM said that it has made significant progress in its technical engagements with 10 out of the top 20 semiconductor companies. The Group has started receiving initial orders as a result of its efforts and expects to report meaningful revenue contribution from these engagements in 2H2022 and beyond.

Furthermore, AEM announced on 31 Aug 2021 it was selected to be the System Level Test (SLT) Solution supplier for one of the industry's leading memory integrated device manufacturers.

• Valuations seem attractive
  
  

At $4.25, AEM’s market cap is around $1,315m. Interestingly, all three research houses -- namely DBS Research, CGS-CIMB and Maybank -- estimate AEM’s FY22F core net earnings to be around S$122 - 124m, translating to around 10.8x FY22F PE. Nevertheless, should analysts reduce their FY22F net earnings estimates, AEM’s FY22F PE will increase, assuming all other things being equal.

Maybank, in its report dated 3 Feb 2022, cited that global test handler/ tester peers are trading at approximately 18x/16x forward PEs respectively, hence AEM looks attractive on a relative basis even if these global test handler/ tester peers may have declined somewhat since 3 Feb 2022.

Investment risks (not an exhaustive list)

As usual, there are bound to be risks in stocks. Below are just some of the investment risks.

• Business, execution and supply chain risks

Competition, delays, earnings misses and order cancellations are some of the usual risks. Furthermore, AEM completed its acquisition of CEI Manufacturing last year. AEM may need some time to integrate CEI into AEM. In addition, it is common knowledge that supply chain issues have been plaguing companies. Furthermore, AEM’s efforts in securing new customers and the consolidation of CEI’s numbers (lower margins) may lead to margin compression for AEM.

• Customer concentration risk

As Intel is AEM’s largest customer, there is customer concentration risk. Any adverse matters which affect Intel may have negative spill over effects on AEM.

• 4QFY21F results likely to be announced on 24 Feb after market
  
  

As I have shared with my clients, buying a stock before its results release involves risks. There is no guarantee that the share price may rise even if it beats estimates / guidance. However, should it disappoint the market, odds are higher that the share price may fall.

As AEM has already dropped approximately 21% from its intraday high of $5.37 on 14 Dec 2021 to close $4.25, suffice to say that the expectations for earnings / guidance beat may not be super high. Furthermore, it is noteworthy AEM only closed at a lower price than $4.25 on 10 Nov 2021 which was the day before its 3QFY21 results were released in the evening. This corroborates my view that little expectations have been priced into the stock for an earnings / guidance beat.   

• Covid; Geopolitical risks; Fed interest rate hikes
  
  

Macro factors such as further spikes in covid cases, geopolitical risks (U.S vs Russia; U.S. vs China etc) and the possibility of faster or / and larger than expected rate hikes may also cast a pallor on the overall equity market which is likely to affect AEM’s share price too.

• Potential share overhang from EPF?

Based on a filing on SGX, EPF sold 854,200 AEM shares on 4 Feb 2022 at $4.53, bringing its interest down to 4.794%. As EPF’s interest has gone below 5.0%, it does not need to report change in its shareholding anymore. i.e., it can continue to sell without reporting. We don’t know whether EPF will continue to sell down its stake but there is likely a fear of share overhang from EPF.

• Potential impairment

Based on its 1HFY21 statement, AEM has S$66.5m of goodwill on its balance sheet arising from various acquisitions (4QFY20 goodwill was S$29.3m). As you are aware, whenever companies report 1H or 2H results, they are generally required to do this impairment assessment, thus, sometimes, they may have some impairment charges at year end which may affect their reported P&L. Nevertheless, such impairment charges are typically one-off and non-cash in nature.

• Tech sector de-rating

The tech sector has taken a beating year to date. For example, Nasdaq has dropped almost 2,100 points or 13.4% since the close of 31 Dec 2021. Suffice to say that the sector’s valuations have derated and this may lead to a potential reduction in AEM’s target prices given by the analysts.

• Stocks in bear market – some market watchers advocate caution

AEM has tumbled approximately 21% from its recent intraday high of $5.34 on 12 Jan to close $4.25 on 18 Feb 2022. Some market watchers believe that if the stock drops 20% from its recent high, it is tantamount to be in a bear market and may not be wise to enter. Furthermore, there may be reasons known to the market but (unknown to me) linked to the sharp 21% fall in AEM’s share price.

• Volatile share price
  
  

AEM’s average daily range is around $0.14. In other words, in a normal day with no particular news and market gyrations, AEM can easily move +/- 0.14, or 3.3%. If there is news or market gyration, then AEM may move more. Readers who have a low-risk appetite need to take into account its rather volatile share price movement.

P.S: I have highlighted AEM to my clients last week. I am vested.

Disclaimer

Please refer to the disclaimer HERE