AEM Holdings - Maybank Research 2023-01-08: Facing Headwinds; Downgrade To SELL

AEM Holdings - Facing Headwinds; Downgrade To SELL

  • With the COVID-19 boom fading, chipmakers are cutting costs and curtailing aggressive spending plans. Intel has already announced plans to cut costs by US$3bn this year and to delay some equipment purchases.
  • We suspect that AEM’s margins may be hurt if key customers are not faring well. As a result, we cut our FY23F earnings estimate by 5% and downgrade AEM to SELL as we lower our pegged P/E to 8.5x from 9.0x FY23E P/E resulting in a lower target price of S$3.08.
  • We prefer UMS (SGX:558) in the Singapore semi-con space due to its strong order-book and earnings growth despite the current weak macro outlook.

AEM's 1H23E won’t be as great as 1H22

  • AEM (SGX:AWX) enjoyed a robust 1H22 due to an exceptional surge in orders by its key customer which will likely not be replicated in 1H23E. 1H22 formed about 64% of our NPAT FY22E estimate.
  • We expect AEM's 1H23E to show a decline y-o-y but this should be partly mitigated by orders from new customers as shown in the surge in inventory to S$117.6m at end-Sep-22 from end-Dec 2021. We also expect orders to be more evenly distributed throughout the 4 quarters in FY23E.

Margins might be impacted

  • Intel has confirmed plans to cut thousands of staff as costs are too high and margins too low. It aims to cut costs by US$$3bn in 2023 and up to US$$10bn by 2025. As a result, we think that it might negotiate on margins with key suppliers if things deteriorate and AEM might be impacted.

Downside risk still present despite correction

  • We believe that the weak outlook from its key customer coupled with a looming recession in Europe and the US signals a lack of positive catalysts going forward and downside risk is evident.
  • We are confident in AEM’s mid-long term prospects but short-term headwinds may present lower priced entry levels in the near-term for investors.

Jarick Seet Maybank Research | 2023-01-08

Previous report by Maybank:
2022-11-07 AEM Holdings - 3Q22 Beat.

Price targets by 2 other brokers at AEM Target Prices.
Listing of research reports at AEM Analyst Reports.

Relevant links:
AEM Share Price History,
AEM Announcements,
AEM Dividends & Corporate Actions,
AEM News Articles

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