Analysts from CGS International and UOB Kay Hian have downgraded their calls on AEM Holdings AWX to “reduce” and “sell” respectively.
The analysts’ reports come after the company reported earnings of $2.4 million for the 1QFY2024 ended March 31, 85% lower y-o-y, coming in 5.4% of the Street’s full-year expectations.
In its business update, AEM attributed the drop to a slower-than-expected recovery from its key customer, as well as a build-up of inventory in the life science and industrial sectors which affected its contract manufacturing revenue for the quarter.
AEM’s first quarter’s net profit also disappointed CGSI analyst William Tng’s expectations, as it made up just 7.1% of his full-year estimates.
In addition to his downgrade, Tng has reduced his earnings per share (EPS) estimates for the FY2024, FY2025 and FY2026 by 32.8%, 20.9% and 39.3% respectively. This comes after a cut in Tng’s gross profit margin (GPM) assumptions, which are now lowered by 3.0 to 3.5 percentage points.
“Although 1QFY2024 revenue [of $94.2 million] was in line with our forecast, net profit margin erosion to just 2.5% suggests that the cost base may still be too high versus the current limited visibility,” Tng explains in his May 8 report.
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“As operating cost data was not disclosed but revenue was in line with our expectation, we assume that gross profit margins were under pressure,” he adds.
With visibility still limited for the 2HFY2024, Tng’s target price is also lowered to $1.84 from $2.32 previously. His new target price is still based on 9.6 times its FY2025 P/E, which is AEM’s average P/E multiple over its FY2017 to FY2022 net profit upcycle.
“We think investors will only relook at this stock in 4QFY2024 when FY2025 prospects are clearer,” Tng continues.
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UOB Kay Hian’s John Cheong has also lowered his target price to $1.67 from $1.94 following his downgrade.
AEM’s earnings for the 1QFY2024 only made up 7% of his full-year estimates as well.
“[AEM’s] near-term outlook has worsened as visibility in 2HFY2024 remains limited, and any uptick in growth is expected to occur only in FY2025,” he writes in his May 9 report.
As such, the analyst has reduced his FY2024 earnings estimates by 42%. This comes after lowering his GPM estimate by four percentage points to 23% and his net profit margin estimates by 3.3 percentage points to 4.5% respectively.
“This is to account for the weaker-than-expected 1QFY2024 margins which we believe are due to a change in product mix with a lower proportion of test & automation equipment as well as weaker operating leverage from the significant revenue decline,” says Cheong.
His new target price is based on 12 times AEM’s FY2025 P/E based on its historical mean.
“We have rolled over our valuation base year to FY2025 to better capture the earnings recovery from AEM's new customers ramping up their production. Previously, we were valuing AEM based on 17 times FY2024 P/E, based on 2 standard deviations (s.d.) above AEM's historical mean,” the analyst explains.
“We have reduced our P/E valuation multiple to 12 times from 17 times as we believe that our FY2025 earnings estimate and the expected 111% y-o-y growth have captured the earnings recovery of AEM. Hence, AEM's P/E multiple peg for FY2025 should normalise back to its mean level,” he adds.
As at 10.43am, shares in AEM are trading 29 cents lower or 12.5% down at $2.03.
