Analysts have become more wary about AEM Holdings AWX , as they cut their target prices for this former high-flying stock following the release of its earnings for FY2023 ended December 2023, citing reduced visibility on when the chip tester can resume its role riding the upcycle of the semiconductor industry. As the company is uncertain if FY2024 will see a strong comeback, they have inputted FY2025 as the year where meaningful recovery would manifest.
On Feb 28, AEM reported 2HFY2023 revenue of $206.1 million, down 36.7% y-o-y, as it continues to suffer from lower demand amid an industry downcycle. This brings full-year FY2023 revenue to $481.3 million, down 44.7% from the preceding FY2022.
Earnings for the full year plunged from $127.3 million in FY2022 to a slight loss of $1.16 million in FY2023, dragged down by $20.9 million worth of red ink in 2HFY2023, attributed to a US$20 million ($26.7 million) settlement of a confidential arbitration.
Unsurprisingly, given the poorer showing, AEM has chosen to withhold paying a dividend. It chose a 1-for-100 bonus share issue instead. In contrast, the company paid total dividends of 10.3 cents for FY2022.
Even as the company was grappling with the industry downturn, AEM shares were weighed down in recent months by the discovery of inflated inventory levels, first disclosed on Jan 14. The FY2023 numbers have included an inventory adjustment of $21.1 million, pending finalisation by the external auditor.
AEM maintains there is no evidence of fraudulent activity. Rather, the shortfall was caused by deficiencies in processes, systems, policies and controls, which were then compounded by users’ inadequate understanding of system functions, which led to incorrect transactions.
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In response, AEM’s chairman Loke Wai San says the management team will be forgoing all bonuses, thereby reducing their annual cash compensation by as much as 50%.
Separately, AEM’s CFO Leong Sook Han has resigned to “pursue personal outside interests” and her last day will be April 16. Lim Kim Hua, who is now the company’s group financial controller, will take over Leong’s responsibilities as the newly-promoted vice president of group finance.
No full-year revenue guidance
Investors were also miffed by how AEM, unlike in the previous years, did not provide a full-year revenue guidance. The company, instead, projected that for the current first half-year to June, it will generate sales of between $170 million and $200 million.
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Some investors would recall that back in FY2022, with the upcycle in full swing, AEM raised its full-year revenue guidance several times, inspiring punters to chase after the counter each time a higher range was indicated. To investors now, a half-year guidance is a clear sign that a clear recovery in 2HFY2024 is not certain.
“Uncertainties surrounding the timing of new product ramps and pace of industry recovery cast a shadow on FY2024,” state DBS Group Research analysts Amanda Tan and Ling Lee Keng.
They have applied the same valuation multiple but with lower earnings seen, their new target price is now $2.26, down from $3. “This adjustment reflects the near-term uncertainties in new customer ramp timings and the pace of recovery in the semiconductor industry,” the DBS analysts say.
Maybank Securities’ Jarick Seet, in his March 1 note, says the inventory shortfall mistake, coupled with the weak guidance, has impacted his confidence in the management’s execution. “While we believe the worst should be over, we think that recovery should only be more substantial in the coming FY2025. As a result, we maintain ‘hold’ for the time being while awaiting clearer signs of substantial order recovery,” says Seet. His new target price of $2.13, reduced from $3.26 previously, is based on a blended 15x FY2024 and FY2025 earnings.
Long-term prospects
John Cheong of UOB Kay Hian acknowledges the uncertain pace of the industry’s recovery, but he remains upbeat about the long-term prospects of the company, underpinned by structural trends of higher test intensity and increased test complexity.
The ongoing boom surrounding artificial intelligence (AI) and the required hardware to support this surge, plays well into what the company can do. “AEM’s competencies … have placed it in an enviable position to capitalise on the opportunities to address the test demand for newly-developed AI devices,” says Cheong. For now, he has maintained his “hold” call and slashed his FY2024 and FY2025 earnings estimates by 53% and 47% respectively. Using a valuation peg of 17x FY2024 earnings, Cheong has lowered his target price to $1.94 from $3.06.
William Tng of CGS International, meanwhile, is holding on to his view that FY2025 will be a better year for AEM, but has for now taken a “prudent” stance in valuing this company. He has lowered his FY2025 earnings forecast by 27.2% and in addition, he has lowered his earnings multiple to 9.6x, which is the average over FY2017 to FY2022, from his earlier valuation multiple of 11.3x. Along with a call to “hold”, a downgrade from “add”, his new target price is $2.32, down from $3.76.
According to Tng, downside risks will include further pushbacks in delivery timeline for customers’ equipment, weaker-than-expected recovery for the semiconductor industry and slower global economic growth, therefore reducing customer demand for AEM.
On the other hand, potential upside includes its key customer taking earlier delivery of its equipment orders and new customers accelerating their equipment purchase orders from AEM.
