Malaysia’s Employment Provident Fund (EPF) increased its stake in AEM Holdings AWX on Nov 10, acquiring 564,500 shares on the open market for $1.89 million or $3.35 each. This brings EPF’s total interest in the chip tester to just over 34.4 million shares, equivalent to a stake of 11.146%.
Another substantial shareholder of AEM recently added to its stake too. On Oct 30, UK fund manager abrdn acquired 382,800 shares on the open market for $1.33 million or $3.48 each. This brings its total stake to 28.15 million shares, equivalent to 9.114% of AEM. Less than a fortnight earlier on Oct 18, abrdn had acquired 273,000 shares for $960,516.56 or $3.52 each.
EPF made the acquisitions a day after AEM announced its 3QFY2023 ended September business update. Besides an earnings drop that was expected, the bottom line was further weighed down by a US$20 million provision for a settlement.
In 3QFY2023, the company reported revenues of $111.7 million, down 45.8% y-o-y. AEM incurred a smaller net loss of $16.1 million compared to the net loss of $20.4 million projected by William Tng of CGS-CIMB Research. For the nine months ended September, AEM reported revenue of $387 million, down 48.2% y-o-y, while earnings dropped 96.9% y-o-y to $3.53 million.
Tougher testing requirements
According to AEM, manufacturers were still reducing their inventory in 3QFY2023, led by a weak macroeconomic environment and slower recovery in demand in key market China. This caused utilisation rates to trend lower for AEM as customers delayed the launch of new products.
Meantime, generative AI is growing in popularity and many devices are starting to incorporate such capabilities. This means tougher and longer testing requirements for chips that are to be used to power these devices. As such, AEM expects demand for its testing services in this market to be realised only towards the end of 2024 and into 2025.
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“The test equipment market has been challenged this year,” says CEO Chandran Nair. “We continue to invest in the technology pillars, which is resulting in a growing patent portfolio, that provides us with the technology differentiation that is highly sought-after by our customers. We firmly believe that we are well-positioned to take advantage of the market upswing expected in late 2024 and beyond,” he adds.
Improved visibility
AEM’s 3QFY2023 updates drew somewhat mixed reactions from analysts, with some trimming their target prices while others stood pat. Tng, citing the pushing back of the recovery, prefers to “err on the side of caution” and trims his earnings forecast for FY2024 and FY2025 by 8.6% and 26.1% respectively.
By applying the same 11.3x FY2025 earnings multiple, which is AEM’s five-year average, his new target price is $3.76, reduced from $4.11. “However, we reiterate our ‘add’ call on AEM’s solid net profit growth prospects in FY2024 and FY2025,” says Tng.
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In his Nov 13 note, Maybank Securities’ Jarick Seet maintained his bullish but long-term view on AEM. He points out that AEM has maintained its FY2023 revenue guidance, suggesting that the worst of the industry downcycle is over and that given the key role AEM plays in this space, it is well poised to ride the rebound in the coming FY2024.
The way Seet sees it, AEM’s guidance for a late 2024 pick-up is based on improved visibility of customer product release schedules. AEM has also maintained its market share with its key customer, understood to be Intel Corp.
Seet has kept his “buy” call but with a lightly trimmed target price of $3.76 from $3.77, based on a blended 13.5x FY2024 and FY2025 earnings.
In their Nov 14 note, DBS Group Research’s Amanda Tan and Ling Lee Keng believe the semiconductor industry is well poised for growth with the push towards greater digitalisation, notwithstanding near-term volatility. While they too agree that the worst of the current down cycle is over, recovery is seen only from late 2024 onwards.
Citing consensus estimates, Tan and Ling note that Intel’s projected capex for 2024 is flattish at just 1% y-o-y. “Our views are largely congruent with AEM’s expectations of a protracted period of lower tester utilisation rates, which pushes out capex spending into late 2024,” they say.
“As yet, we also do not expect a ramp-up in new generation equipment for the key customer in the next two years, as the capability requirements for the next two to three years have been met. Meanwhile, engagements with new customers continue to progress with ramp-ups expected in 2HFY2024,” the analysts add, keeping their “hold” call but with a reduced target price of $3 from $3.11 previously.
