UOB Kay Hian analyst John Cheong has downgraded AEM Holdings AWX to “sell” with an unchanged target price of $2.87, expecting the company’s near-term earnings to remain weak.
In his June 20 report, Cheong says that AEM’s one month share price rally of about 30% — which was largely driven by increased interest in artificial intelligence (AI) related stocks — is overdone.
In late May, chip giant Nvidia’s strong sales forecast caused a sharp share price rally among semiconductor-related stocks including AEM. Despite the possible longer-term benefits from the secular growth in the semiconductor sector on the back of increasing adoption of AI-related chips, the global semiconductor demand is expected to be weak in 2023.
Cheong notes that AI-related chips account for only a small share of about 3% of the total semiconductor sales, with other segments expected to contract in 2023. This will not be able to lift global semiconductor sales out of decline for this year.
Citing BCA Research’s June review of major semiconductor consuming sectors, there is a subdued picture for global semiconductor demand for two major segments. Devices — such as mobile phones and tablets which account for about 40% of semiconductor sales — are seeing sluggish consumer demand due to overconsumption in previous years.
Meanwhile, the semiconductor demand for automobiles, servers and industrial electronics — which accounts for about 30% of the sales — will experience less than 5% growth in 2023. This will not be enough to offset lower demand in the consumer electronic goods sector in the near term, Cheong highlights.
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Even after cutting his FY2023 earnings estimates significantly after its 1QFY2023 ended March results, AEM’s first quarter earnings still forms only 20% of UOBKH’s full year earnings estimate.
“AEM’s 1QFY2023 earnings of $15.6 million were below our expectations. This was due to weak net margin, which fell 5.4 percentage points y-o-y to 10.2% in 1QFY2023, due to change in product mix as revenue contribution from the high margin consumables segment fell, and revenue from the services segment, which has lower margin, rising 53% y-o-y,” adds Cheong.
He further notes that AEM’s latest guidance in 1QFY2023 indicates an uncertain near-term outlook. The company has maintained its 2023 revenue guidance of $500 million, indicating that it may be revised up or down as second half visibility becomes clearer.
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Moving forward, the chances that global semiconductor producers’ stock prices will continue to rally through the second half of the year are low, Cheong points out. This is as the surge in AI chip demand only helps a few companies while the boom in smartphone chips benefitted a much larger pool of semiconductor players.
Shares in AEM closed 9 cents lower or 2.26% down on June 20 at $3.88.
