AEM's upcoming 3Q results are expected to be dismal, no thanks in part to a one-off expense of US$20 million in settlement of a legal suit. 

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But looking beyond that, the signs are for a semiconductor industry recovery which will benefit Singapore-listed AEM (market cap : S$1.1 billion).

More specifically, what happens at its key customer, Intel Corp, will have a bearing on AEM's profitability. An oversized bearing.

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Intel has just released its 3Q results and a commentary on its business outlook. DBS Research takes us through the key points relevant to AEM's near-term future.  Read on....  

Excerpts from DBS Research report

Read through of Intel’s 3Q23 earnings
• Key customer beat consensus forecasts on top and bottom lines in 3Q23; delivers upbeat guidance for 4Q23 above consensus forecasts

AEM 

Share price: 
$3.40

Target: 
$3.11

• Brighter outlook of key customer paints a more positive picture for AEM, though handler sales could be constrained by adequacy of Intel’s existing installed base

• 
Many moving parts with bright spots, but no strong catalyst in place

• 
We currently have a HOLD call with TP S$3.11, more updates to come after AEM’s 3Q23 earnings release

graphic 10.22

Key customer beat consensus forecasts on top and bottom lines in 3Q23. Intel’s 3Q23 adjusted earnings per share exceeded market expectations, reaching US$0.41 (+11% yoy), surpassing consensus estimates of US$0.22 and above high end of prior guidance.

Revenue came in at $US14.2b (-8% yoy), above the street’s estimates of $13.5b.

At the segmental level, CCG (client computing group) revenues of $7.9b (-3% yoy, +16% qoq) was driven by inventory sell-through and stronger ASPs (average selling prices).

"... we believe that Intel’s improving outlook could translate to higher device volumes, which flows through to AEM via increased consumables sales."

DCAI (Data Centre and AI) revenues of $3.8b (-10% yoy, -5% qoq) was affected by continued softness in the total addressable market and competitive pressure, albeit mitigated by record Xeon ASPs owing to customer and product mix.
 

Key customer delivers upbeat guidance for 4Q23 above consensus forecasts. Intel’s guidance for 4Q23 puts revenue at $14.6-15.6b and EPS at $0.44, above consensus estimates of US$14.3b and US$0.32 respectively.

The PC market is likely past bottom and sequential growth in CCG could come through in 4Q23 with inventory burn of CCG customers completed in 1H23.

For DCAI, Intel sees modest sequential TAM growth in Q4 as inventories normalises despite a shift in spending from CPUs towards accelerators.  

Brighter outlook of key customer paints a more positive picture for AEM, though handler sales could be constrained by adequacy of Intel’s existing installed base. Capacity driven growth which is a function of volumes and test times is on the cards but hinges on the adequacy of Intel’s existing installed base of handlers.

We opine that handler demand may not increase in the same magnitude as industry recovery as Intel had pulled in delivery of products in FY22.

Nonetheless, we believe that Intel’s improving outlook could translate to higher device volumes, which flows through to AEM via increased consumables sales. 

Many moving parts with bright spots, but no strong catalyst in place. AEM has longer-dated non-cancellable purchase orders amounting to c.S$280.0m, expected to be converted to revenue in the next 1-1.5 years and possibly skew top-lines in FY24/FY25.

While company filings in FY22 indicate that new customer capability ramps could be expected from 2024, we do not have much visibility into the timing and magnitude of the ramp.

We also do not expect new generation equipment ramp for the key customer in the next two years as capability requirements for the next two to three years has been met.


We currently have a HOLD call with TP S$3.11, more updates to come after AEM’s 3Q23 earnings release.

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