AEM Holdings dives 25%; analyst downgrades stock, slashes target

Singapore

SHARES of AEM Holdings continued their downward trajectory on Wednesday, losing almost a quarter of their value as brokerage CGS-CIMB downgraded the stock to "reduce" on sharply lower 2019 estimates.

Yesterday, AEM slumped 24.6 per cent, or 24.5 Singapore cents, to $0.75 amid heavy volume of some 33.76 million shares, making it one of the day's most active stocks.

Coupled with Tuesday's 19.5 Singapore cent drop, the stock has lost almost 40 per cent, or S$119 million, of its market value in just two days.

The two-day decline wiped out nearly all the gains that the stock has made since the start of 2018. It peaked at S$1.90 in mid-March.

The stock's plunge began on Tuesday after the company warned of "significant volatility" ahead despite a second-quarter net profit of S$9.5 million, up 15.6 per cent year-on-year.

In a note on Wednesday, CGS-CIMB analyst Willian Tng downgraded the stock from "add" to "reduce", citing the company's poor earnings visibility for 2019. He also slashed his target price for the stock to S$0.69 from S$1.78 previously.

Underlying the pessimism is concern over the order outlook from Intel Corp, which is understood to be AEM's major customer although tech contractors like AEM typically do not disclose the identity of key customers due to confidentiality requirements. In May, Bloomberg reported that Apple was planning to use its own chips to replace processors from Intel as early as 2020. Intel draws about 5 per cent of its annual revenue from Apple.

AEM has said the initial ramp-up phase of its equipment at its customer sites will be completed by the end of Dec 2018, following which it expects a rolling upgrade phase which could "introduce significant volatility" in its business.

Wrote Mr Tng: "Our current thesis that its major customer will replace its legacy generations of Test Handler (TH) with AEM's new TH remains intact. However, given that the ramp-up phase in demand from its customers is likely over, the timing and occurrence of such replacements are less clear.

"As such, we believe that AEM's earnings will peak in FY2018 and decline year-on-year in FY2019," he said.

Singapore tech stocks could be stuck in range-bound trading in the near term due to a lack of catalysts despite their cheap valuation, noted analyst Ling Lee Keng at DBS Group Research.

"Generally, share price (of tech companies) has stabilised in the past month, and if there are no negative surprises from the current set of results, we expect this trend to continue," Ms Ling said.

She added that given the choppy global outlook, tech stocks are not expected to return to the high levels seen in March this year.