New High in 2020; Maintain BUY

• AEM (SGX:AWX)’s FY20 revenue guidance was 4-11% higher than our forecast.
• We believe that Intel’s pivot to gain share in adjacent markets may expand the wallet size for HDMT TH. We also view the acquisition of Mu-TEST positively, as this allows AEM to provide end-to-end SLT solutions through AMPS.
• ROE-g/COE-g Target Price is raised, as we roll forward to 3.8x blended FY20-21E (from 4.1x blended FY19-20E previously).
• BUY.

Positive Surprise for FY20E Revenue Guidance

• Our updated FY20E revenue is near the mid-point of the guided SGD330- 350m. Drivers are
  1. sustained momentum from its key customer, which based on common market knowledge, is identified to be Intel; and
  2. rising contributions from other initiatives.
• If the sanguine outlook persists into 2H20, we do not rule out positive guidance revisions, which would be a catalyst, in our view. This is on account that
  1. current order book already forms around 70% of full year revenue guidance;
  2. and that the order lead time for HDMT TH is around 5 months.
• Key risk is if we have overestimated profitability.

New Trends at Intel a Boon for AEM Long Term

• To capture 5G and AI opportunities, Intel is pivoting to gain share in adjacent markets. AEM should benefit from this as:
  1. this may widen the wallet size for HDMT TH over time; and
  2. AEM should be continually plugged in to the R&D efforts of the customer, as each new chip tested on HDMT requires a customised kit.
• Separately, we understand that the hybrid equipment, to be commercialised this year, focuses on burn-in test for Intel’s Foveros 3D stacked chips.

Buys Mu-TEST to Enhance AMPS Proposition

• We believe the acquisition of France-based Mu-TEST enhances AMPS’ value proposition, as AEM is now able to provide full SLT solutions (test handler and tester). Mu-TEST’s proprietary FPGA-based technology is aimed at mid and high-end ICs, and is generally applicable for SoCs, digital ICs, memories and sensors.
• Mu-TEST’s solutions are highly customisable and we understand can be easily integrated with AMPS handlers based on customers’ requirements.

Revising Up FY20-21E Forecasts

• We raise FY20-21E EPS by 11-16% following AEM’s guidance update for FY20. We have also fine-tuned other line items such as gross margin and staff cost assumptions. Capex guidance of SGD4m is comparable to the SGD3-4m it guided in FY19E. Click on view full report button below for complete analysis.
• Our ROE-g/COE-g Target Price is based on 3.8x blended FY20-21E P/B (rolled forward from 4.1x blended FY19-20E P/B). This is in turn based on 34.7% average FY20-21E ROE, COE of 10.6% and LTG of 2%.

Source: Maybank Kim Eng Research - 9 Jan 2020