• AEM's FY20 net profit surges 85% y-o-y to S$97.6m.
• Strong momentum in the industry and for AEM.
• AEM's share price trading at a 51% discount to its peer average of 21.0x.

AEM's FY20 Results Review

AEM's FY20 net profit increased 85.0% y-o-y to S$97.6m, in line with our estimates.

• AEM (SGX:AWX)’s 2H20 net profit increased 38.9% y-o-y to S$42.3m. The increase in FY20 net profit was mainly driven by growth in the Equipment Systems Solutions (ESS) segment on higher orders. Meanwhile, FY20 net profit margin increased 2.5ppts to 18.8%, from 16.3% in FY19, largely due to an increase in operating leverage.
• AEM's FY20 revenue increased 60.6% y-o-y to S$519.0m, driven by its key customer. 2H20 revenue increased 42.2% y-o-y to S$245.3m. The increase in FY20 revenue was primarily driven by growth in its ESS segment, which increased 62.8% y-o-y to S$501.3m. Revenue from its ESS segment accounted for 96.6% of its full-year revenue. We believe that almost the entirety of its revenue from this segment continues to come from its key customer, Intel.
• Proposing final dividend of S$0.04 per share, up from S$0.031 per share in FY19. This brings AEM's FY20 full-year dividend to S$0.09 per share, up from S$0.051 per share in FY19. This represents a dividend payout ratio of 25.4% in FY20.

AEM will abstain from providing financial guidance for FY21F until the close of its offer for CEI Limited.

• CEI Limited (SGX:AVV)’s shareholders are expected to receive the Offer Document between 14-21 days from 15 February (announcement date). The offer will remain open for acceptance by CEI’s shareholders for at least 28 days from the date of posting of the Offer Document. We believe the offer should conclude by end-March at the earliest.

Our Thoughts, Earnings, and Recommendation

Momentum in the industry continues to remain strong.

• The 3-month US Semiconductor Equipment Billings which we track closely, indicates that the momentum in the industry continues to be strong. The y-o-y % change in the billings data reversed and turned positive in October 2019 and January 2021 marks its 16th consecutive y-o-y increase. The billings increased 29.9% y-o-y to US$3.0bn in January 2021.

Strong surge in demand for chips due to COVID-19 has led to a chip shortage.

• Recent news headlines have reported global chip shortages due to demand for chips rebounding strongly, far outstripping planned supply. The semiconductor industry was already primed for a structural uptrend with the new wave of technological advancements (5G, IoT, AI, EVs, autonomous driving, etc.) sweeping in. COVID-19 further accelerated the demand for chips with other structural trends of its own such as increased telecommuting.
• For instance, remote working and studying have spurred the demand for better electronics at home on the consumer end. Intel, which currently owns about 80% of the CPU chips in the PC market, reported a 33% y-o-y increase in PC sales. Enterprises that provide cloud solutions and telecommunication platforms have also had to increase spending to upgrade their infrastructure to cater to the surge in user traffic due to increased telecommuting.

We view the global semiconductor chip shortage as more of a positive development.

• Qualcomm’s incoming CEO has said that orders for chips that run computers, cars, and many other internet-connected devices are swamping the positive for AEM.

AEM's FY21F/22F Earnings Forecast Raised by 8%/22%

• Revise AEM's FY21F/22F earnings by 8%/22% on the continued strong momentum in the industry and the inclusion of CEI’s acquisition. We continue to remain 50-50. In this case, 5.4m new shares will be issued, representing 2.0% of AEM’s outstanding shares in FY20.
• We have also assumed that the acquisition will be completed by end-3Q21. We have projected FY21-23F earnings of S$6-7m for CEI and we estimate its contribution to be S$1.6m to AEM in FY21F.

Maintain BUY on AEM With a Higher Target Price

• We raise our target price on the back of higher FY21 earnings. Our target price of S$5.36 for AEM is pegged to 13.7x FY21 earnings, which is the same as its previous peak in 2018. This represents a 35% discount to its peer average of 21.0x.
• AEM's share price is currently trading at 10.3x FY21F earnings, which is at a 51% discount to its peer average.

Source: DBS Research - 2 Mar 2021