Updated 12 March 2021
Image:  AEM Holdings

• AEM&rsquo s 2H20 results in line.  In 2H20, AEM had S$245.3mn sales (+42% YoY), S$46.5mn PBT (+27% YoY) and S$42.3mn PATMI (+39% YoY). Sales were below our expectations but PATMI exceeded expectations.
• Change is constant.  AEM continued its acquisition spree with the acquisition of Lattice Innovation, incorporation of new subsidiary Wavem, and plans to acquire SGX-listed CEI Limited.
• Maintain OUTPERFORM  with lower TP of S$5.05.  We expect AEM&rsquo s blistering growth pace to decelerate this year, after 6 years of high double digit growth which saw revenue expand close to 16x from 2014&rsquo s trough. AEM remains fairly undervalued relative to test equipment peers, as investors seek shelter from the lack of forward guidance.

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4Q20 left little to the imagination

4Q20 sales of S$83.4mn is -5.9% YoY while 4Q20 PATMI is +7.3% YoY. FY20 core sales of S$519mn are in the upper range of AEM&rsquo s last estimate of S$500-520mn, though missing our expectations of a guidance beat, as we were expecting a year-on-year sales beat. Production mix skewed back towards consumables in 4Q20. Overall FY20 mix is at 57% tools & machines and 43% consumables, a favourable mix for the longer term. While AEM has traditionally guided for machines to have lower margins than consumables, profit margin of 18.7% came in above our 18% estimate, supported by lower tax rates from a write back of tax provisions.

Acquisition spree continues

The past 2 months saw AEM announce an acquisition offer for CEI Limited (SGX: AVV), a listed contract manufacturer with focus on printed circuit boards and various semiconductor capital equipment involved in wafer sort and optical inspection. AEM cites vertical integration, improved regional presence and enhanced service and product offerings for its customers with CEI&rsquo s assembly and box build capabilities. Though CEI&rsquo s acquisition is EPS accretive for AEM regardless of which option CEI shareholders choose, we expect minimal positive sales impact with the acquisition, and for synergies to come from the cost end or from the strategic standpoint of supply chain diversification.

Key customer dynamics remain the same.

Intel has hired a new CEO, Pat Gelsinger, who was an ex-CTO at Intel. In Intel&rsquo s 4Q20 earnings call, Intel announced that 7nm products are on track for a 2023 launch, and most products are to be produced internally. While Intel&rsquo s usage of external foundries have been headline news in recent months, we see core dynamics to be unchanged for AEM and Intel as the key products of compute and server processors are to remain in-house, a boon for AEM&rsquo s HDMT and new test handler iterations.

No guidance, no worries

While AEM has perhaps inadvertently delayed guidance for FY21, our checks on the key customer and fellow key customer suppliers indicate that we may still be at the early-mid stages of capital equipment investment.

Forecasts

We continue to forecast for about 6% YoY core revenue growth, after adjusting our product mix forecast to skew towards machine production over consumables. Our profit margin forecast remains around 18% for FY21/22/23.   Our forecast currently excludes the impact from CEI&rsquo s acquisition.

Valuation & Action

Maintain OUTPERFORM, with reduced 12M Target Price of S$5.05.

We maintain 14x P/E peg, above AEM&rsquo s usual PE band as we expect continued tailwinds for the semiconductor capital equipment industry. Given AEM&rsquo s recent increase in production capacity, we may see further upside to our TP.

Risks

Weak order book, long-term competitiveness of key customer, US-China trade tensions.