Maybank Securities has downgraded AEM Holdings AWX following the chip tester's discovery of the inventory shortfall that will push it into the red when it reports its FY2023 earnings.
"While AEM has proven itself over the years, the inventory shortfall mistake has impacted our confidence in management’s execution," writes analyst Jarick Seet in his Jan 17 note, calling this a "basic error".
"While we believe the worst should be over, we now only expect a more substantial recovery in the coming FY2025," says Seet, referring to the semiconductor cycle.
"As a result, we downgrade to 'hold' from 'buy' while awaiting for clearer signs of substantial order recovery," says Seet.
AEM on Jan 14 said via the course of an internal audit, it discovered an inventory shortfall of between 5 and 7% of $358.6 million reported as at Sept 30 2023.
The company blames the discrepancy to "human data entry error", caused when it shifted some of its operations to Penang.
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Seet estimates AEM will take an impairment of between $18 and $25 million when it reports its FY2023 later next month, which will likely send the company into a full-year loss.
In addition, Seet is also pricing in a weaker-than-expected recovery of the semiconductor cycle.
As such, he has cut his FY2023 and FY2024 earnings forecast by 232% and 34% respectively.
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Seet's previous target price was $3.76, based on 13.5x blended FY2024 and FY2025 earnings. His new target price is $3.26, based on a lower multiple of 13x.
Similarly, John Cheong of UOB Kay Hian has downgraded the stock from "buy" to "hold", along with a lower target price of $3.06 from $3.63.
In his Jan 17 note, Cheong says that the episode will likely "put a dent in the stock confidence in the near to medium term."
In addition, he sees "limited positive catalysts" in the near term given that ramp-up of production is only expected late this year, as previously guided by the company.
Cheong projects AEM to report a loss of $10 million when it reports its FY2023, along with a "lacklustre" guidance for FY2024.
Separately, William Tng of CGS-CIMB has stood his ground, maintaining his "add" call and $3.76 target price.
In his Jan 16 note, Tng says that the inventory shortfall will not have an operational impact, as based on investigations so far, the discrepancy wasn't caused by fraud nor involving external suppliers.
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"AEM's business with customers will not be negatively impacted as requisite inventories to fulfill customers' orders are intact," notes Tng, citing the company's comments.
He estimates AEM will report a net loss of $12.2 million for FY2023, instead of earnings of $8.6 million, and will pay a "token" dividend of a cent, versus a total of 10.3 cents paid for FY2022, when AEM reported earnings of $127.3 million.
Tng reiterates his "add" call on the stock, citing positive growth prospects in tandem with the industry's cyclical recovery.
His target price of $3.76 is pegged to 11.3x FY2025 earnings, which is the five-year average.
Downside risks include a further pushback in the delivery timeline for customers’ testing equipment, weaker-than-expected recovery for the semiconductor industry and slower global economic growth.
Potential rerating catalysts, on the other hand, include stronger-than-expected orders from its major customer and a ramp-up in orders from new customers.
Similarly, Citi Research's Luis Hilado has kept his "buy" call and $3.78 target price on the stock. Following the company's briefing to analysts on Jan 16, Hilado notes that the inventory issue has no impact on future manufacturing or sales, and no implications on current contracts worth some $280 million as well.
"The migration is already completed and systems are being evaluated and worked on to prevent future issues," says Hilado in his Jan 16 note.
As at 10.18am, AEM shares changed hands at $3.11, down 1.89% for the day.
