Room for Guidance Upside; Maintain BUY

• AEM Holdings (SGX:AWX)'s 1Q20 net profit was a record SGD36.1m (+447.8% y-o-y, +115.8% q-o-q), forming 61% of our FY20E, driven by strong demand from Intel and operating leverage.
• Following the update, we raise FY20-21E EPS by 8- 11% and ROE-g/COE-g Target Price to SGD3.18, now on 4.1x blended FY20-21E P/B (prev: 3.8x).
• FY20 revenue guidance of SGD360-380m is unchanged. Still, we see room for upward revisions, which is a catalyst, in our view.

Record Revenue and Profit; No Pull-ins

• AEM's 1Q20 revenue of SGD146.8m (+178.5% y-o-y, +65.6% q-o-q) was ahead of the SGD135-145m guidance given in Mar-20, mainly driven by Intel. We believe the strong quarter was largely due to orders won since last year, and management notes that there are no pull-ins from future quarters.
• Orders and requirements for handlers and consumables with Intel remain strong, and AEM does not expect new products to be delayed.

Key Risk Is Further Supply-side Disruptions

• As management appear confident of achieving its FY20E revenue guidance, we raise our estimate to the top end of guidance. We believe current order book would have grown from the SGD338m in Feb-20 as demand drivers are intact, and that AEM is a beneficiary of the customer’s expanding wallet size.
• For FY20E, the key risk is further supply-side disruptions, although various government mandated movement restrictions have not resulted in material impact thus far.

Drivers Likely More Structural Than Cyclical

• For FY21E, our top concern is a likelihood of high-base effects from FY20E, and the risk that Intel could normalise capex. We believe this is alleviated as management continue to view that structural and technology drivers for AEM’s products (e.g. more complex chips require increased testing, therefore more equipment are needed to maintain throughput) may be more dominant than cyclical factors (e.g. capex fluctuate depending on supply chain inventory levels).
• We note that Intel expects its first 7nm chip and Foveros 3D-stacked chip in 2021. Further, we continue to expect new accounts, such as from the memory customer and Huawei to contribute to growth as well.

Source: Maybank Kim Eng Research - 29 Apr 2020