Resilient Order Momentum; Maintain BUY

• AEM Holdings (SGX:AWX) has raised FY20E revenue guidance to SGD430-445m from SGD360-380m in Feb-20 (see AEM Announcements), affirming our view that demand trends are intact. Accordingly, we raise our FY20-22E EPS by 17-23% and our ROE-g/COE-g Target Price to SGD4.04, based on 4.8x blended FY20-21E P/B (prev: 4.1x).
• Further positive guidance revisions should be a catalyst, while key risk to FY20E earnings is unforeseen production delays in 2H20.
• Maintain BUY.

Highly Achievable Guidance

• AEM's current order book for FY20 delivery is SGD416m (Feb-20: SGD338m; Jan- 20: 245m), or more than 90% of full year guidance. Barring unforeseen production delays in 2H20, this guidance appears highly achievable.
• In our view, a possible but unlikely scenario could be government mandated factory shutdowns in 2H20, in the event of a worse than expected spread of Covid-19 in Singapore and/ or Malaysia, where AEM’s production and supply chain are predominantly located.

Reinforces the View of Demand Resilience

• The current update reinforces the view that in the short term, orders and requirements for handlers and consumables with Intel remains strong. As such, we see any delays in FY20E deliveries as just a deferral to FY21E.
• Over a longer horizon, we see Intel’s CPU to XPU strategy (see report: AEM Holdings - Maybank Kim Eng 2020-01-29: Better Than Expected Guidance) as a key driver of AEM’s growth as an increased variety, complexity and volume of chips imply that the structural need for effective and cost-efficient testing remains intact, and may continue to result in expanding wallet size over time.

Risks

• In report: AEM Holdings - Maybank Kim Eng 2020-04-29: Demand Trends Intact, we highlighted that we may have underappreciated how technology and structural factors (e.g. increasingly complex chips result in longer test times) are more dominant demand drivers for AEM’s products than cyclical factors.
• Still, we remain wary of cyclical risks given a highly uncertain economic outlook over FY20-21. As such, we provide a sensitivity analysis of a range of FY21E earnings outcomes towards fair value.
• For this exercise, we hold FY20E earnings constant.

Source: Maybank Kim Eng Research - 7 May 2020