AEM - DBS Research 2024-08-15: Not A “Chip” Bargain Yet

• AEM (SGX:AWX) reported 1H24 revenue of S$ 173.6 mn (- 37% y-o-y), comprising 42% of our prior FY24 estimates and at the lower end of 1H24 guidance of S$170-200mil. The TCS (test cell solutions) segment, which accounted for 58% of group revenue, fell 42% due to weakness at the key customer.

1H24 revenue and earnings below ours and consensus expectations.

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• The contract manufacturing business, accounting for 41% of group revenue, decreased 29% y-o-y owing to prolonged inventory digestion in Industrials.
• Due to lower revenue and higher mix from contract manufacturing, gross profit margin fell 5ppts to 25%. Net profit margin also fell 7 ppts to 0.5%, further impacted by a loss on disposal of an associate of S$2.3mil and restructuring charges above S$2.1mil.
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• No dividend was declared for 1H24, similar to 1H23.

Our thoughts

2H24 revenue guidance of S$160-180mil points to 18 % y-o-y decline, but flat relative to 1H24.

• Our thesis for AEM which highlights “two sides to a chip – key customer weakness, new customer growth” remains valid. AEM continues to be negatively impacted by the challenges of its key customer despite new customer contributions being on a positive trajectory.
• 2H24 will continue to be impacted by weak demand for new capacity from Intel but on a q-o-q basis, we are expecting strong sequential growth in 4Q24 on the back of deliveries of the new AMPS-BI solutions to its new customer.

Overhang from key customer weakness remains but there are mitigating factors.

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Amanda TAN DBS Group Research | Lee Keng LING DBS Research | https://www.dbs.com/insightsdirect/ 2024-08-15 SGinvestors.io

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