Fund manager abrdn has significantly raised its stake in AEM Holdings AWX after the chip tester announced it had discovered a shortfall in its inventory levels which will likely reverse AEM into the red when it reports its FY2023 ended December 2023 earnings later next month.
On Jan 14, AEM spooked the market when it announced an inventory shortfall following an internal audit. In a follow-up announcement on Jan 22, the company estimates the shortfall to be between $18 million to $25 million. The amount will be booked in its 4QFY2023 earnings, which will be reported next month as part of the company’s full-year earnings.
Substantial shareholder abrdn on Jan 16 acquired nearly 1.03 million shares at just over $3.24 million on the open market. This works out to around $3.15 each. On Jan 18, it acquired another 249,700 shares at $769,150.90 or about $3.08 each. This brings abrdn’s total stake to more than 34.2 million shares or 11.079% — up from 9.846% before the shortfall was announced.
Since late last year, abrdn and another substantial AEM shareholder, the Employee Provident Fund (EPF) of Malaysia, have been actively raising their respective stakes in the chip tester to take advantage of a correction of some 40% from its peak.
With this latest round of acquisition, abrdn’s stake of 11.079% puts it almost neck-to-neck with EPF’s 11.146% as of Nov 10 last year. Before the acquisition earlier this month, the most recent acquisition by abrdn was on Oct 30 when it acquired 382,800 shares at $3.48 each.
Meanwhile, AEM’s largest shareholder remains Venezio, a subsidiary of Temasek Holdings. Back in August 2021, Venezio acquired 26.8 million new shares via a placement at $3.8477 each. It has since made sporadic acquisitions from the open market, which according to Bloomberg data, lifted its total stake to more than 38.6 million new shares, equivalent to 12.5%. However, unlike EPF and abrdn, Venezio has not been making any open market transactions since March 2023.
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Apart from these three investors with almost equal stakes, the distant fourth-largest AEM shareholder is Pandanus Associates, which held just over 18.5 million shares, or 5.99%, as at Nov 20, 2023.
In its follow-up announcements, AEM stressed that the shortfall was due to human error and not fraud. Existing orders being fulfilled would also not be affected.
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This led analysts including William Tng of CGS-CIMB to keep his “add” call and $3.76 target price, noting in his Jan 16 report that the inventory shortfall will not have an operational impact. Taking the shortfall into account, Tng expects AEM to report a net loss of $12.2 million in FY2023, instead of earnings of $8.6 million. In contrast, AEM reported earnings of $127.2 million in FY2022 when the semiconductor cycle was at its previous peak.
Tng reiterates his “add” call on the stock, citing positive growth prospects amid the industry’s cyclical recovery. His target price of $3.76 is pegged to 11.3x FY2025 earnings, which is the five-year average.
On the other hand, Jarick Seet of Maybank Securities was appalled by how the shortfall could have occurred, calling it a “basic error”. “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.
Besides feeling negative towards AEM, Seet sees the semiconductor industry recovering later than what many investors are hoping for. “While we believe the worst should be over, we now only expect a more substantial recovery in the coming FY2025,” says Seet, who has downgraded his call to “hold” from “buy”, along with a lower target price of $3.26, from $3.76 earlier.
According to Bloomberg data, out of the seven active calls on AEM, there are three “buys” or equivalent and four “holds”. The target prices range from as high as $3.78 given by Luis Hilado of Citi Research to as low as $3 given by Ling Lee Keng of DBS Group Research.
