AEM's 3Q20 Earnings Ahead; Maintain BUY

• AEM (SGX:AWX)'s 3Q20 PATMI of SGD24.3m (+77.4% y-o-y, +27.1% q-o-q) was ahead of our and consensus expectations.
• We raise AEM's FY20E PATMI by 3%, on the back of AEM's positively revised FY20 revenue guidance of SGD500-520m from SGD480-500m previously. However, our FY21-22E earnings are largely unchanged pending FY21E revenue guidance in Jan '21.
• Maintain BUY and Target Price of SGD5.05 (14x FY21E P/E).

Key Customer Drives Strong 3Q20

• AEM's 3Q20 revenue rose 93% y-o-y to SGD161.8m, on the back of Intel's demand for tools, consumables and services.
• AEM will spend SGD2mil on R&D in 4Q20 for future projects, and have hired more staff to boost core engineering capabilities.

AEM's Long Term Growth Drivers Unchanged

• AEM remains positive on long-term growth prospects. The rollout of 5G enables increased complexity in mission-critical applications. This has resulted in unprecedented challenges in chip testing. Heterogeneous packaging is also becoming mainstream, as traditional Moore's law scaling faces limitations.
• VLSI Research expects system level test (SLT) to grow 4.4x faster than wafer sort and functional test in 2020-24, as SLT is beneficial in overcoming limitations of current design-for-test techniques, which leave millions of transistors untested.

Opportunities to Buy the Dips May Emerge

• AEM expects seasonality patterns to normalise to 2Q/3Q being peak quarters, and 1Q and 4Q being lulls in any given year. This contrasts what was observed in 4Q19/1Q20, where these were the strong quarters within 2019/2020 respectively. This normalisation may imply difficult y-o-y revenue comparisons in 4Q20/1Q21.
• At the same time, AEM's share price has risen 125% in the past 12 months. As such, we see risks of lacklustre AEM's share price performance until Jan-21 when FY21 revenue guidance is provided, and this may provide opportunities for investors to accumulate on dips.
• Key risk is if Intel faces steeper than expected market share loss, which may temper the pace of equipment orders to AEM.

Source: Maybank Kim Eng Research - 4 Nov 2020