Following AEM Holdings’ 1HFY2024 ended June 96% y-o-y plunge in earnings to $822,000, analysts at CGS International and DBS Group Research have kept their respective “reduce” and “hold” calls on the company at respective reduced target prices of $1.72 from $1.82 previously and $1.34 from $1.97 previously.
Meanwhile, Maybank Securities’ Jarick Seet has downgraded the company to “sell” from “hold” at a reduced target price of $1.12 from $2.02 previously.
CGSI’s William Tng notes that AEM’s 37% y-o-y fall in revenue to $173.6 million during the period did not meet his expectations, forming 47% of his and 40% of Bloomberg’s full-year forecasts.
Tng also notes that the revenue was also on the low-end of AEM’s previous guidance for $170 million to $200 million.
He adds that net profit from the period formed 4% of his and 3% of Bloomberg’s full-year forecasts.
“In 1HFY2024, AEM recorded restructuring cost of S$2.3 million and loss on disposal of an associate of $2.3 million, as well as foreign exchange gain of $2.0 million. Excluding these items, net profit would have been $3.4 million,” writes Tng in his Aug 15 report.
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The analysts understands that revenue in the company’s test cell solutions segment fell 42.1% y-o-y due to weak demand from its key customer, while the contract manufacturing segment’s revenue similarly decreased 28.8% y-o-y due to prolonged high inventory levels for end-customers.
For the 2HFY2024, AEM has guided for a revenue of between $160 million to $180 million, leading to a full-year guidance of between $333.6 million to $353.6 million.
The semiconductor player has also received a purchase order of $20 million for its recently announced product, and it unveiled its patented PiXLTM intelligent thermal control technology
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“AEM expects its new customers to drive q-o-q revenue growth in 4QFY2024,” writes Tng. He sees investors only relooking the stock in the period when FY2025 prospects are clearer.
He concludes: “Given the 1HFY2024 earnings miss and still-low demand from its key customer, we reduce our FY2024 to FY2026 revenue forecasts by 10.5% to 18.9%, leading to an 18.1% to 54.4% reduction in our earnings per share (EPS) forecasts.”
Potential upside risks noted by home include AEM’s key customer taking earlier delivery of its equipment orders and new customers accelerating their equipment purchase orders. Conversely, de-rating catalysts include a further delay or cancellation of customers’ orders and slower global economic growth .
Meanwhile, DBS’ Amanda Tan and Ling Lee Keng note that AEM continues to be negatively impacted by the challenges of its key customer despite new customer contributions being on a positive trajectory.
On the company’s key customer, Intel, the analysts note that an earnings miss in the 2QFY2024 and a tepid 3QFY2024 outlook sent the US semiconductor manufacturer’s share price tumbling 26% after its earnings release.
“The key concern is that Intel’s poor fundamentals and aggressive cost cutting initiatives would substantially scale back demand for test offerings from AEM,” write Tan and Lee.
They add: “We believe that Intel is likely to extend the useful life of test equipment as it implements cost discipline measures and has factored in close to a 30% fall in test cell solutions revenue.”
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Despite this, the DBS analysts believe that there are several mitigating factors that partially negate the weakness of its key customer.
They see demand from Intel being backed by non-cancellable long-dated purchase orders initially announced at $280 million back in FY2022.
“Further declines in demand for AEM’s offerings is capped as Intel is unlikely to eliminate standard tests. Chip testing is still essential, especially when moving towards new nodes. Mid last year, Intel had already identified savings of US$500 million ($658 million) per year by eliminating non-standard tests,” continue Tan and Ling.
They estimate new customer contribution of around 23% in FY2024 and 39% in FY2025, from around 8% in FY2023. “On an absolute basis, new customer contributions are expected to be around $80 million in FY2024 and around $185 million in FY2025.”
The analysts also understand that AEM’s key customer will not be a key beneficiary of artificial intelligence (AI), especially when compared to semiconductor leaders Nvidia and AMD.
They write: “The silver lining is that we believe one of its (AEM) recently announced key customers is a significant player in AI, though it trails Nvidia by a wide margin.”
Overall, the DBS analysts have reduced their FY2024 and FY2025 revenue forecasts by 17% and 22% respectively. With AEM’s lower operating leverage on reduced toplines and a one-off restructuring cost, as well as the disposal of non-core assets, Tan and Lee have also revised their FY2024 and FY2025 earnings estimates downwards by 75% and 43% respectively.
They conclude: “We expect sentiment to be negative in the near-term, especially as consensus downgrades forecasts. The share price is likely to see a knee jerk reaction due to the earnings miss and weaker than expected guidance before trading range bound, at least until positive catalysts from the new customers emerge.”
Maybank’s Seet expects the growth from AEM’s new customers to take multiple years to play out before it matches that of its core existing customer.
He concludes: “As AEM is undergoing a transition to growing its new customers to replace the lost revenue from its existing key customer, we expect this to take years and currently valuations are years ahead of earnings that can match up with uncertainty in its ramping up.”
Upside factors noted by the analyst include synergistic and accretive acquisitions and positive customer-related news flow that could catalyse improved orders for AEM. Conversely, downsides include emerging technology from rivals that could erode AEM’s competitive position with its customers.
As at 1.37 pm, shares in AEM Holdings AWX are trading 25 cents lower or 17.1% down at $1.21.
