DBS downgrades AEM to 'sell' as it sees 'testing times' ahead

Felicia Tan
2-min read
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The team at DBS has also lowered its target price to $2 from $3.19 previously.

DBS Group Research analyst Ling Lee Keng and the rest of the brokerage’s Singapore research team have downgraded AEM Holdings AWX to “sell” from “buy” as they see “testing times” ahead for the group.

AEM had reported a 30% y-o-y decline in its earnings of $43.9 million for the 2HFY2022 ended Dec 31, 2022 on Feb 24.

“Weak outlook and poor visibility of key customer demand begets uncertainty for AEM. The outlook for its key customer could continue to be gloomy given weakness in the PC market and consumer electronics alongside the risk of recession which could slow spending on data centres,” writes the team.

“Macroeconomic headwinds could also affect Intel’s cash generating abilities to finance its aggressive capital spending plans, which could run the risk of order deferments,” it adds.

Further to its downgrade, Ling and the team have also lowered their earnings estimates for the FY2023 to FY2024 by 42% and 37% respectively due to a “sluggish outlook” for its key customer. The reduced earnings estimate also come on the back of AEM’s revenue guidance of $500 million, which came in lower than expected.

On this, the team has lowered its target price to $2 from $3.19 previously.

“We roll over our valuations to 9x FY2023-FY2024 earnings, which is slightly below the historical mean. AEM is currently trading above +1 standard deviation of its historical mean and we expect further share price weakness given a much poorer outlook,” the team writes.

Despite the downgrade, Ling and the team sees a brighter outlook for AEM and the semiconductor industry at large.

AEM, which is a pioneer in providing system level test (SLT) solutions, is currently one generation ahead of its competitors, notes the team.

“Given its technological superiority, we believe AEM is well positioned to ride on the growing SLT market that has benefitted from increased complexity of chips and increased test coverage requirements, alongside the need for advanced heterogeneous packaging,” it adds.

The semiconductor industry is also “well poised” for growth owing to the push towards digitalisation.

“McKinsey projects that the semiconductor industry will become a trillion-dollar industry by 2030. Industry megatrends such as artificial intelligence, 5G and Internet of Things will pave the way for growth in test spend owing to higher test volumes and test times. Longer test times would also require more of AEM’s components due to wear and tear,” says the team at DBS.

Shares in AEM closed 33 cents lower or 9.76% down at $3.05 on Feb 27.

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