Capturing Upside Opportunities; Target Price +19%; BUY

• AEM Holdings (SGX:AWX) raised FY20 revenue guidance to SGD480-500m from SGD460-480m. We raise FY20-22E EPS by 5-7% to account for this.
• We now value AEM Holdings at 14x FY21E P/E, from ROE-g/COE-g derived 5x blended FY20-21E P/B, to better account for:
  1. upside from system-level test’s structural growth prospects from new customers/ stronger-than-expected order momentum; and
  2. potential for valuation gap to narrow against global peers due to increasing international investor participation.
• BUY.

Continued Relevance With Key Customer

• Intel updated on its progress on its six pillars of technology innovation1 strategy at its Architecture Day on 13-Aug. Takeaways from Intel’s Architecture Day include that Intel will continue to decouple design from process technology, as well as focus on advanced packaging technologies to drive leadership products.
• We believe this is favourable to AEM as heterogeneously packaged chips come with testing challenges at the wafer level that can be overcome by system level test (SLT) at the packaged level to ensure product reliability.

Exciting End-markets Beckon

• Automotive and edge computing are growth markets where SLT is advantageous, but we believe AEM Holdings has little to no penetration yet. Automotive chips are challenging to test given requirements for zero defect and high thermal reliability.
• AEM Holdings presented at the SEMI SEA 2020 conference on how its asynchronous, modular and massively parallel approach to SLT can tackle these challenges in a cost-effective way. We walked away with a greater appreciation for AEM’s AMPS solution, and believe exciting end-markets beckon for AEM.

Takeaways From AEM’s Presentation at SEMI SEA Conference

• We attended AEM’s presentation at the SEMI SEA 2020 conference in Aug-20, entitled “System Level Test (SLT) for Automotive Devices – A Thermal Perspective”.

Forecast & Target Price Revisions

• We raise FY20-22E EPS by 5-7% to account for the latest revision in guidance. We switch our valuation methodology from ROE-g/COE-g derived P/B to P/E as we believe this enables us to better gauge AEM’s fair value. Our rationales include:
  • Strong cash build under-reflects ROE generation. AEM’s business is asset light and its key enablers lie in its human capital as well as IPs (e.g. HDMT test handler, proprietary FPGA for Inspirain). Based on projected cash-generation, we expect AEM to maintain net-cash to equity above 70% throughout our forecast period. While this cash-hoard is strategic for potential acquisition opportunities, it under-reflects AEM’s ROEs and penalizes derived multiples from the ROE-g/COE-g approach.
  • Capturing unquantifiable earnings upside risks. In our view, upside to current forecasts stem from better-than-expected order momentum in the short term; and new customers in the long term. Such upside is not quantifiable, but we believe are legitimate factors to consider in arriving at a holistic view of AEM’s future economic opportunities. We continue to favour SLT’s growth prospects, in particular in markets such as edge computing and electric and/or autonomous driving, where SLT’s propositions are attractive, but penetration is still low.
  • Re-rating opportunities from global investors. With continued earnings growth, we believe AEM may eventually achieve USD1b in market cap and more. This may unlock the opportunity for increased global investor participation, along with more global perspectives of AEM’s growth prospects. We believe this may in turn spark a re-rating for AEM’s P/E multiples to narrow the gap compared to global peers.

Potential for Valuation Rerating

• AEM is trading at 9x FY21E P/E, and our Target Price is based on 14x. We believe 14x is fair given:
  1. AEM’s market leading SLT capabilities; and
  2. structural growth prospects for SLT, including with the key customer; yet
  3. it remains at a discount compared to global peers trading at around 17x, to account for single-customer concentration.
• We now favour using P/E over ROE-g/COE-g derived P/B as this overcomes:
  1. under-reflected ROE generation due to strong cash build;
  2. unquantifiable ROEs from new and potential customers; and
  3. potential re-rating sparked by an incrementally global investor base if earnings growth paves the way for USD1b market cap and higher.
• In the shorter term, we believe weaker-than-expected FY21E order momentum is a key risk. This may be due to a challenging macro environment and/or our concern that some equipment orders may be pushed out to FY22 alongside the delay of Intel’s 7nm products. We are also mindful of faster-than-expected market share loss at Intel, as this may translate to lost chip volumes that could underpin more resilient equipment order momentum.

Source: Maybank Kim Eng Research - 11 Sep 2020