AEM: Mid- to long-term outlook remains bright

■   3Q22 revenue (S$206.1m, +41.0% yoy, -26.0% qoq) was 20.3% above our S$171.3m expectation.

■   3Q22 net profit (S$32.2m, +38.3% yoy, -23.4% qoq) was 27.4% above our S$25.3m expectation.

■   Reiterate Add on its mid-term growth prospects. Yoy comparisons will get easier for AEM from 2H23F given its strong 1H22 performance.

We see AEM achieving the high end of its revenue guidance
3Q22 revenue jumped 41.0% yoy to S$206.1m, beating our expectations of S$171.3m by 20.3%. 3Q22 net profit grew 38.3% yoy to S$32.2m, also above our expectations of S$25.3m by 27.4%.

The sequential growth in revenue and net profit is in line with AEM’s earlier guidance and was driven by the volume ramp-up for its next generation system level testing (SLT) handlers and peripheral tools. AEM maintains its FY22F revenue guidance of S$820m-850m.

This implies a weaker 4Q22 revenue of S$73.4m-103.4m vs. 3Q22’s S$206.1m and 2Q22’s S$278.6m.

We forecast AEM will hit S$850m revenue in FY22F (the upper end of its S$820-850m unchanged guidance).

Cash balance as at end Sep-2022 was S$153.6m (vs. S$180.9m as at end-Jun 2021).    

Mid- to long-term outlook remains bright
AEM sees a positive outlook over the mid to long term as it believes that

1) advanced packaging will make up more than 60% of the packaging market by 2030 (vs. 40% in 2020) and that global logic device revenue could double from US$248bn (2021) to US$508bn (2030),

2) the semiconductor market could grow to US$1tr in the early-2030s, driven by the computer/AI, automotive, data storage, and wireless markets. Although short-term geopolitical uncertainty could temporarily hamper China’s growth, AEM expects the US/European countries to increase their investments in semiconductors, and

3) AEM believes that 300mm fab capacity could deliver 10% CAGR over 2022-2025 and that back-end capacity has yet to see an increase in investments to accommodate front-end production increases.

Recommendation William Tng, CFA.Given the better-than-expected net profit margin performance, we raise our FY22F EPS by 2.5% as our margin assumption was more conservative. We think AEM’s strength in system level test services (handlers and complete testing solutions) is intact, hence its long-term prospects remain strong; reiterate Add. We value AEM at 9.7x P/E (0.5 s.d. above its 6-year average) on our FY23F EPS forecast. There is no change in our valuation basis.

Re-rating catalysts are stronger-than-expected orders from its major customer and earlier-than-expected success in securing orders from other potential customers.

Downside risks are delivery delays and the loss of its sole supplier status for its major customer, which will negatively affect AEM’s profitability.