Analysts from Maybank Securities and UOB Kay Hian are remaining positive on AEM Holdings after Intel announced that its 18A process node is six months ahead of schedule. The node is expected to be manufacturing ready by the 2HFY2024.
“This should help Intel regain manufacturing leadership. Intel said research and development (R&D) for the node is on or ahead of milestones, imbuing confidence it can begin manufacturing on this node in 2024,” says Maybank Securities analyst Lai Gene Lih.
Lai has kept his “buy” call on AEM with an unchanged target price of $6.34 on the back of the news.
“As we expect Intel to continue to be a sizeable AEM customer, we believe this news has long-term positive implications for Intel’s dominance and market share, and for demand for AEM’s equipment,” he adds.
Furthermore, Lai is upbeat on AEM’s outlook as he sees the company riding on Intel’s spending plans.
“We see the 2022 ramp-up of HDMI and HST test handlers as part of a capital expenditure (capex) replacement cycle within Intel. This means equipment demand from back-end capacity expansion - which follows front-end capacity additions – remains “untapped” and should underpin prospects in coming years,” he writes in his report on April 27.
As Intel builds up its front-end capacity across the US and Europe to reduce its chipmaking reliance on Asia, AEM is set to benefit from the trend as its back-end capacity will be required, adds Lai.
The company could also benefit from the equipment shipment around 2HFY2023 from Intel’s new Penang plant. The plant should begin operations in early FY2024, he continues.
On the potential supply disruptions arising from the Russia-Ukraine war, AEM has not seen any material direct impact from the war yet. It has, however, sought to mitigate risks by building up its inventory to ensure that there are enough supplies for future deliveries.
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“AEM provides strong synergies like field-service capabilities and manufacturing scale for the high-tech companies that it acquires,” says Lai.
“Over time, we expect increasing contributions from non-Intel revenue sources,” he adds.
Upside swing factors include revenue growth from securing new customers, or via increased orders from its existing customers.
Synergistic and accretive acquisitions, as well as positive customer-related news flow are also potential catalysts to AEM’s share price.
Meanwhile, order cancellations, delays, lower-than-expected earnings, emerging technology from its rivals, are all downside risks to AEM.
UOB Kay Hian starts AEM at ‘buy’
UOB Kay Hian analyst Clement Ho has initiated “buy” on AEM Holdings with a target price of $5.60.
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The target price implies 15.6x of AEM’s FY2022 earnings.
“Our valuation is at a premium to the Singapore peer average forward P/E of 10.1x. More direct competitors listed in the US and Japan trade at an average of 18.8x forward earnings,” Ho writes in an April 29 report.
Like Maybank’s Lai, Ho is positive on AEM as Intel’s March IDM 2.0 strategy is “a major bet that future demand and profitability lie in the packaging of modular dies (or chips)”.
These chips, which are also known as “tiles”, can squeeze in more computing in a single package.
“Driving towards that goal, Intel intends to build new fabrication plants (fabs) for these new ‘tiled’ chips, and is expected to outsource the production of certain modules. Existing capacity has also been earmarked for the foundry services market,” says Ho.
In addition, Intel’s decision to maintain old fabrication plants and build new ones will allow AEM to enjoy a steady demand for its consumables and services. The new fabs will lead to more orders for test equipment.
AEM’s acquisition of CEI will also lead to “meaningful” cost savings at around $5.6 million to $9.0 million a year as AEM can in-source some of its production activities to the latter.
“At the entity level, CEI is expected to also contribute $4.0 million a year of incremental net profit to the overall group. We believe our estimates are conservative as we have not factored in further upside from capacity expansion in CEI’s box-build business,” Ho writes.
In his estimates, Ho has not yet factored in new customers “from whom AEM expects more meaningful contributions from 2022 onwards”.
Shares in AEM closed 1 cent higher or 0.21% up at $4.82 on May 4.
