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Is It Time to Consider Buying AEM Holdings?

·4-min read
Semiconductor Testing
Semiconductor Testing

The world is facing an acute shortage of semiconductors, a problem that has persisted since late last year.

Top semiconductor manufacturing companies are warning that this crisis could last till 2023 as demand for electronic devices explodes due to the pandemic.

In response, global chipmakers have invested heavily to boost their manufacturing capacity, with more complex chips needed to power electric vehicles and traffic management systems.

For instance, major Taiwanese chipmaker TSMC (TPE: 2330) plans to invest US$100 billion in the next three years to expand its manufacturing capacity.

Meanwhile, United Microelectronics Corp (TSE: 2303), another Taiwanese chip manufacturer, expects to spend US$1.5 billion on new equipment this year, up 50% from 2020.

AEM Holdings Ltd (SGX: AWX), which is widely believed to provide Intel Corp (NASDAQ: INTC) with equipment to test its chips, is a direct beneficiary of this increased demand.

Since the start of 2020, AEM’s share price has doubled as surging demand for semiconductor chips has resulted in a surge in revenue and net profit for the group.

Its share price is already up around 13% year to date but with the pent-up demand for chips, is it a good time for investors to consider owning the company?

An unexpected decline

For 2020, AEM reported record revenue of S$519 million, up 60.6% year on year.

Net profit had surged by 85% year on year to S$97.6 million in tandem with the rise in revenue.

The group also hiked its full-year dividend to S$0.09, up 76.5% year on year.

However, for its fiscal 2021 first quarter (1Q2021) operational update, AEM reported a surprise 45.4% year on year plunge in revenue to S$80.2 million.

Net profit dived by 63.5% year on year to S$13.2 million.

AEM explained that 2020 had been an exceptional year and so 1Q2021 saw a decline due to the high base established in the prior period.

Nevertheless, the group’s share price tumbled from S$4.05 to S$3.40 in a week but has since recovered.

A partnership and an acquisition

Despite the setback, AEM is forging ahead with business development initiatives to grow its business.

In April, the group announced a partnership with Ateco Inc, a South Korean company that specialises in the design and development of memory test handler solutions.

The transaction involved the purchase of a 26.59% stake in Ateco costing around US$3.8 million, with a right to acquire up to 65% of the company.

This move followed the group’s earlier announcement of the acquisition of CEI Limited, a company that undertakes contract manufacturing and design of proprietary equipment, for S$1.15 per share.

The rationale for the acquisition was that CEI provides a “strategic fit” for AEM and will provide a host of synergistic benefits that include the improvement of manufacturing processes and efficiency.

Strong tailwinds for the sector

There is a lag effect on investments in high-end testing capabilities, as these have not been in tandem with the increased investments in chip manufacturing capacity.

AEM’s chairman, Loke Wai San, mentioned that the group is on track to scale up new-generation testing equipment at Intel’s sites by the end of this year.

The underinvestment in testing equipment could lead to another bottleneck in the chip supply chain, spelling more growth for AEM, he said.

More acquisitions are also on the cards, and other funding sources such as a rights issue may also be announced.

The sector’s tailwinds are a boon for investors who were caught by surprise at the testing company’s 1Q2021 earnings.

Get Smart: Risks remain

Despite the sanguine outlook and the chairman’s upbeat assessment of the sector, risks remain for AEM.

Intel is the group’s sole customer, and its fortunes are tied very closely to the chip giant.

Any cutback in investments on Intel’s part could severely impact AEM.

That said, the group is attempting to diversify outside of Intel, though it may take a while before any diversification efforts yield tangible results.

AEM expects a better second half for 2021 as their tools are slowly phased into customers’ manufacturing sites.

Investors who feel confident about the group’s prospects may want to make use of the current weak sentiment to accumulate shares.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.

The post Is It Time to Consider Buying AEM Holdings? appeared first on The Smart Investor.

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