• AEM's 1Q21 net profit falls 63.1% y-o-y to S$13.3m, 2Q21 results likely to be muted as well.
• Look beyond 1H21; pipeline of catalysts to help boost prospects from 2H21 onwards.
• AEM's share price is trading at 44% discount to its peer average of 19.6x. Maintain BUY with a lower target price of S$4.73.

AEM's 1Q21 Results Review

• AEM (SGX:AWX)'s 1Q21 net profit came in below our expectations, declining 63.1% y-o-y to S$13.3m. The sharp drop in net profit was due to 1Q21 revenue decreasing 45.4% y-o-y to S$80.2m and net profit margin normalising to 16.5% (-8.1ppts y-o-y).
• The large y-o-y decline in revenue was due to unfavourable y-o-y comparison to an exceptional ramp-up in equipment sales to Intel (its key customer) seen in 1Q20.
• 1Q21 revenue from Tools & Machines declined 72.9% y-o-y to S$21.0m while revenue from Consumables and Services declined 22.8% y-o-y to S$53.5m.
• 1Q21 net profit margin was in line with our expectations, normalising to 16.5% y-o-y due to lower operating leverage.

Key Corporate Developments

• Next-generation test handlers on track to start high volume ramp at its customer sites in late 3Q21 and into FY22.
• Technology acquisition and in-house R&D bearing results with engineering engagements with 10 out of the top 20 semiconductor companies for potential volume ramp in FY22/23.
• CEI Limited (SGX:AVV) became a subsidiary on 19 March 2021.
• AEM entered the memory IC test market with ATECO investment.
• Revenue guidance of S$460-520m for FY21.

Our Thoughts

• In its 1Q21 results briefing, Intel had guided for a record FY21 capex of US$19-20bn, which was higher than the analysts’ estimates of US$14.6bn at that time. Despite strong industry data and positive developments from Intel (key customer), AEM reported 1Q21 net profit that was below our expectations.
• We have distilled our thoughts and believe that it could be due to one of the two reasons, or both.
  • Intel could believe Intel could have made a strategic decision to wait for the next generation of tools as these new tools are highly differentiated tools for the high-performance computing segment.
• We believe it would make strategic and logical sense for Intel to defer its orders to AEM as they would be ‘killing two birds with one stone’.

Momentum in the industry remains strong meanwhile.

• Industry data points and developments continue to indicate strong momentum in news development as it indicates strong demand in the industry.

Things should pick up from 2H21: Next-generation tools (3Q21-FY22) and potential new customers (FY22).

• We believe AEM's next quarter results could continue to be muted due to its key aims to achieve meaningful revenue from these engagements in FY22. New customers and the consolidation of CEI’s financials could reduce AEM’s concentration risk to its key customer.

AEM - Earnings Forecast & Recommendations

Reduce AEM's FY21F/22F earnings forecast by 11.6%/7.1% on lower revenue from its key customer.

• We are reducing our revenue growth assumption for AEM in FY21F as we believe its key customer is likely to defer some of its orders as it prioritises on building fabrication plants and purchase front-end equipment, and as it times its purchase of AEM’s next generation of tools. We also increase the contribution of CEI’s financials from one quarter’s worth to three.
• We believe our FY21F revenue projection of S$602m, which is above AEM management’s guidance could raise its revenue guidance for the remainder of FY21F. In 2019 and 2020, AEM's management raised its revenue guidance 3-4 times after the initial guidance in May.

Maintain BUY with a lower target price of S$4.73, from S$5.36 previously.

• We lower our target price of AEM on the back of lower FY21F earnings. Our target price of S$4.73 is pegged to 13.7x FY21F earnings, which is the same multiple as AEM’s previous peak valuation in 2018. This represents a 30% discount to its peer average of 19.6x.
• AEM's share price is currently trading at 11.0x FY21F P/E, which is at a 44% discount to its peers.

Source: DBS Research - 5 May 2021