Brokers’ take: CGS-CIMB downgrades AEM with lower target price

CGS-CIMB downgraded its call on AEM to “reduce” from “add”, with a view that the stock’s current share price has already priced in a semiconductor sector recovery in the next year.

The brokerage also reduced its price target to S$3.30 from S$3.86 in a report on Monday (Aug 7), ahead of the semiconductor equipment maker’s first half-year earnings release on Friday.

CGS-CIMB analyst William Tng noted that AEM is now trading at 11.4 times its forecast price-to-earnings ratio in 2024, which is higher than the sector average of 10 times.

“While we are cognisant of the positive long-term demand for semiconductors, we fear that the recovery in FY2024 may be slow,” Tng added.

In anticipation of persistent interest-rate hikes, slow global semiconductor sales and geopolitical tensions, Tng trimmed AEM’s revenue forecasts for FY2024 by 11.1 per cent, and FY2025 by 18.6 per cent, resulting in 5.6 per cent and 18.6 per cent cuts in earnings per share forecasts for the next two years, respectively.

He noted that as the semiconductor industry cycle is hurt by ongoing geopolitical tensions and the higher interest-rate environment, AEM could reduce its FY2023 revenue guidance once its H1 results are released.

The brokerage’s reduced revenue estimates also factored in arbitration settlement costs of US$20 million, which was announced on Jul 28. In Tng’s view, further litigation on this dispute could affect AEM negatively.

“Legal and professional fees incurred to reach this settlement, if any, could further reduce FY2023 net profits.”

Furthermore, demand conditions in the semiconductor sector could turn quickly.

SEE ALSO

Chip shortage in rearview mirror but car dealers still face other supply chain issues

Chinese semiconductor maker Hua Hong rises in Shanghai debut

AEM to settle ‘confidential’ arbitration with US$20 million payment

“AEM’s major customer could bring forward its purchase requirements, which could lead to upside risks to our current FY2024 to FY2025 revenue assumptions,” said Tng.

Shares of AEM were trading up 1.7 per cent or S$0.06 to S$3.51 as at 11.33 am on Tuesday.