AEM - DBS Research 2022-08-16: On Track To Beat Records; 1H22 Profit Before Tax Jumped 187% Y-o-y

• AEM (SGX:AWX) reported record-high half year revenues of S$540.5m in 1H22 (+181% y-o-y, +45% h-o-h). The surge in revenue can be attributed to the ramp up of the new generation SLT (system level test) handlers, burn-in test handlers, increased sales of consumables and tools, as well as contributions from CEI (SGX:AVV).
• Highest half yearly profit before tax of S$102.0m (+187% y-o-y, +35% h-o-h); gross margin declined to 30.8% (vs 34.0% in 1H21).
• Revenue guidance revised upwards a second time, 6-7% higher at S$750m-S$800m. AEM's guidance hints at a weaker half. 1H22 revenues made up 68-72% of the full year guidance.

Our Thoughts

Growth in test spend continues to be a key driver for AEM.

• On the back of shifts towards 5G, artificial intelligence, Automotives, IOT and Cloudification, volumes of devices are expected to increase. At the same time, the higher complexity off devices, increased test coverage requirements, and adoption of advanced packaging will drive device test times.
• AEM expects that the Test 2.0 market could potentially grow 8x over the next 8 years, in line with VLSI Research’s view that SLT is expected to grow 4.4x faster than wafer sort and functional test in 2020- 2024 on the back of higher test coverage reliability.
• Overall, we think that AEM is well-positioned to ride this trend given its lead in the SLT market.

Supply chain disruptions still likely to weigh on margins.

• There is still a lot of uncertainty surrounding the supply chain disruptions and AEM has not seen much improvement in lead times. Considering the very strong first half, we think that margins are likely to tread closer to the 1H22 reported numbers. As such, we have conservatively lowered our gross profit margin assumptions to 31.5% and 33% in FY22F and FY23F respectively (vs our previous projections of 35.9% and 36.8% in FY22F and FY23F).
• We are however expecting the supply chain disruptions to see some improvements in the second half which could provide some uplift to margins.

Passing of US CHIPS Act a key positive for AEM, mitigating capex cuts from key customer.

• Congress passed the CHIPS Act in July 2022 and this is expected to benefit AEM’s key customer, Intel. The CHIPS Act mainly provides subsidies that offsets the costs of building new fabs in the US, lowers the cost of research and development, and aids with workforce development.
• Although the impact on AEM is not immediate, it is expected that the front-end investments will flow to the backend around the third quarter of next year. We think that this should help to mitigate the impact from Intel cutting its FY22 capex guidance to $23bn, down from $27bn.

Acquisition of Nestek to benefit the higher margin consumables business.

• AEM has acquired a 53.3% stake in Nestek with a consideration of S$16.2m. The group will also acquire an additional 26.7% of shares in the future for a consideration of S$8.2m, which brings total shareholding to 80%. AEM also has an option to purchase the remaining 20% from existing shareholders for S$5.4m.
• Nestek is a south Korean company that is involved in the design and manufacture of consumables such as pins and sockets. We are positive on this acquisition as consumables generally has higher margins in excess of 40%.

Better customer diversification with two new customer wins.

• AEM has received orders for its test handling solutions from a leading high-performance computing / artificial intelligence company. The other new customer in the mobile devices space has placed orders for AEM’s application processors.
• Furthermore, AEM has been increasing its engagement with other semiconductor companies. We keep a lookout for new customer wins which should help in reducing concentration risk from the key customer.

Maintain BUY recommendation on AEM with lower target price.

• We have increased our revenue forecasts for AEM by 4.5% and 2.5% for FY22F and FY23F respectively due to the strong ramp of new generation handlers. However, our earnings forecasts for AEM have been reduced by 2.6% and 0.5% for FY22F/FY23F on the back of margin pressure.
• Maintain BUY recommendation on AEM with lower target price of S$5.88. Our target price for AEM is pegged to 15x, ~+ 2 standard deviation of its 4-year average P/E on FY22F earnings given the ramp of the new generation handlers.