DBS Group Research analysts Amanda Tan and Ling Lee Keng have upgraded their call on AEM Holdings AWX from “hold” to “buy” with a raised target price of $1.67 from $1.34. As they bet on an impending turnaround for the chip tester.
Overall, the analysts believe that the company is at an inflexion point with new customers, while its new fabless artificial intelligence (AI) customer could potentially grow into a key customer account. They add that revenue in AEM’s existing key customer, Intel, should stabilise from 2HFY2024 onwards.
While as at the 1HFY2024 ended June, the company is still mainly in the lab verification tool phase, it will soon shift into production in the second half.
With customer diversification, AEM should be able to yield more significant returns starting from 4QFY2024 and into FY2025 and beyond, suggest Tan and Ling.
“AEM expects new business revenue to double in FY2024, and double again in FY2025, reaching triple-digit millions,” write the analysts in their Nov 7 report.
Meanwhile, they note that the new fabless AI customer, which is not named, holds the most promise of growing to be a key customer account. Such is their confidence that the analysts believe this new customer could ‘mirror the success story’ with Intel, which has helped propel AEM to record levels in the previous industry up-cycle.
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Tan and Ling point to their similar end markets of client computing and data centres, areas where the success of AEM’s offerings has been tried and tested with Intel.
“This gives us optimism that the success could be mirrored with the new fabless AI customer although we acknowledge that it is somewhat premature to say with certainty that AEM can achieve the same magnitude in contributions from the new fabless customer.”
Furthermore, AEM is also intent on acquiring more programme wins across test insertions which are steps towards developing the new fabless AI customer into a key customer account in the future.
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Currently, the company has announced that its advanced system level test (SLT) insertions will be used for next generation AI devices, and it will also supply automated burn-in test solutions to one major fabless provider of AI chips.
For the 2HFY2024, Tan and Ling estimate Intel’s contribution to be around $50 million versus $90 million in the first half, as its share of test cell solutions reach parity or cross over to nearly 50:50 near the end of the year.
“Despite a recovering semiconductor market and consensus expecting Intel’s volumes to grow by low-mid single digits, we believe that an annualised base revenue of $100 million in FY2025 to FY2026 is fair given Intel’s intention to save over US$500 million ($661 million) annually on test spend.”
They continue: “We are projecting a flattish base revenue from 2HFY2024 onwards as wallet spend from Intel has already been reduced substantially and we think that the bulk of savings from reducing non-standard tests should have already been incorporated.”
Intel will also start drawing down on its $280 million non-cancellable purchase order, which the analysts note will be over the span of 1QFY2025 to 2HFY2027. With this, Tan and Ling have conservatively projected an annual incremental boost of around $50 million to revenue from Intel between FY2025 and FY2027
Despite the cut in new customer contributions, AEM’s revenue and earnings are still expected to grow by 24.7% and 194.8% y-o-y respectively in FY2025 after the slump from FY2023 to FY2024.
“Thereafter, we project revenue and earnings to recover by 13.1% and 39.0% in FY2026 on the back of new customer contributions,” write Tan and Ling.
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The analysts note that while AEM’s upcoming 3QFY2024 results are still expected to remain weak given that an initial order of around $20 million will only ship in 4QFY2024, they have upgraded their call as they ‘look ahead to FY2025 and beyond’.
Tan and Ling believe the company is at the cusp of a multi-year rollout for new customers.
They write: “Any dips or weaknesses going forward could be good opportunities to accumulate as we remain convinced by the longer-term story of AEM.”
Due to more conservative projections on new customer contributions, industrial weakness affecting AEM’s subsidiary CEI, and lower gross margin assumptions, the analysts have reduced their FY2025 earnings by 24%.
“Despite the earnings revision and consensus having a negative view on the stock, we take a contrarian stance, believing that most of the negatives should be in the rear-view mirror, ” write Tan and Ling.
They conclude: “Hence, we expect the discount between AEM and its peers to revert to the historical mean at around 50%.”
Key risks noted by the analysts include a slower ramp of new customers and weakness in AEM’s key customer, Intel.
As at 10.26 am, shares in AEM are trading 7 cents higher or 5.74% up at $1.29.
