AEM Holdings Ltd: Fears of order deferments (CGSCIMB Report)

AEM share price reacted negatively to news of US restricting exports of chips to China and media reports of possible job cuts at its major customer, Intel.

Investor focus has shifted to capex cuts by Intel affecting AEM; a view we do not share. We think there is a risk of order deferment instead, over FY23-24F.

Reflecting this view, we cut our FY23-24F sales forecasts and P/E multiple to factor in an earnings slowdown, leading to a lower TP of S$3.76.

Negative newsflow affecting AEM share price

AEM share price fell 21.5% from S$4.14 on 7 Oct 2022 to S$3.25 on 13 Oct 2022, reacting to new US restrictions on chip-related exports to China and media reports (Yahoo news, 12 October 2022) of possible job cuts at Intel (INTC US, Not Rated, CP: US$ 26.42).

Potential loss of China market a concern

Based on Intel's FY21 annual report, the personal computer related chip business for Intel was US$37.4bn while the data centre (DC)-related chip products segment was a US$37.4bn in sales. While Intel does not supply chip manufacturing equipment, the industry concern is how much of Intel's DC-related chips could be affected by the sales ban to China.

AEM expansion plan on track – order deferment a risk

AEM also remains on track with its Penang plant expansion expected to come online between end-Oct to early-Nov 2022. According to New Straits Times (17 Dec 2021), Intel's new multi-phased expansion in Penang is expected to begin production in early 2024.

In our view, Intel has leeway to defer its orders for test handlers (THs) from AEM and we assume that such a deferment could occur over FY23-24F and hence cut our sales assumptions for AEM by 6.7-7.1%, leading to 11.2-11.8% decrease in our EPS forecasts.

Addressing growing uncertainties

We think AEM's strength in system level test (handlers and complete testing solutions) remains intact, hence long-term prospects remains strong – reiterate Add. If the semicon industry is headed for a 2023F decline, AEM's valuations could revert to its 6-year (FY17-22F) average P/E multiple of 8.0x. However, we opine that AEM's patented TH technology warrants some premium.

Hence, we now value AEM at 9.7x (0.5 s.d. above its 6-year average) on our reduced FY23F EPS forecast given possible order deferments. Previously we used 14.9x (+2 s.d. above its 6-year average).

Re-rating catalysts are stronger-than-expected orders from its major customer and earlier-than-expected success in securing orders from other potential customers. Downside risks are delivery delays and the loss of its sole supplier status which will negatively affect AEM's profitability.