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Broker's take: DBS initiates coverage on AEM with 'buy', S$2.38 target price

Mr Loke Wai San, executive chairman of AEM Holdings. DBS Group Research has initiated coverage on AEM Holdings, which provides advanced chip testing solutions, with a "buy" call, and a 12-month price target of S$2.38.

DBS Group Research has initiated coverage on AEM Holdings, which provides advanced chip testing solutions, with a "buy" call, and a 12-month price target of S$2.38. This target price represents a 39 per cent upside from the counter's close of S$1.71 on Nov 28.

AEM is believed to be the sole supplier of test handlers to semiconductor giant Intel, and the company is expected to leverage on its key customer increasing capital expenditure (capex) and production capacity, DBS said in a research note on Friday.

DBS analyst Ling Lee Keng said: "Intel has guided for a record-high capex of US$16 billion in FY19 on the back of developments in new technology. The company intends to continue to increase its 14-nm (nanometre) and 10-nm production capacities by 25 per cent each in 2020 to meet customers' demand. This should drive demand for test handlers, where AEM is believed to be the sole supplier."

In addition, new technology including artificial intelligence, 5G and data centres would drive longer test times, leading to higher demand for test handlers, DBS noted.

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"As technology nodes shrink, longer test times are required to perform more complex tests... Systems and devices used in safety-critical markets such as automotive (driverless vehicles), industrial, and medical equipment, will require more stringent system level tests. These would lead to higher demand for test handlers," added Ms Ling.

The brokerage also noted that AEM is working on revenue diversification through new projects and customers. AEM is now working with Intel to provide hybrid extensions for their existing handlers, as well as new technology used in quantum computing test. Other initiatives include supplying cable testing solutions for Huawei's 5G rollout.

Nonetheless, one key risk to this positive outlook includes single-customer concentration risk, since AEM is heavily dependent on Intel's orders for its revenue, DBS noted. In FY2018, Intel accounted for 94 per cent of AEM's revenue.

"However, due to AEM's customised solutions that stem from its 17-year working relationship with Intel, AEM is able to substantially reduce the cost of testing for its major customer. As such, Intel relies heavily on AEM for its test handlers.

"Given our positive outlook on the areas Intel is focusing on, and that Intel is a world-class semiconductor company, we believe AEM will continue to grow with its major customer, and this is more of a boon than a bane," DBS said.

Other key risks include escalation or continued prolonging of geopolitical events, as well as foreign exchange risk, DBS noted.

Separately, in an industry note also released on Friday, DBS cited AEM Holdings as a proxy for the semiconductor industry.

"As the demand for semiconductors increases, more chips would have to be manufactured and tested. As such, AEM's earnings move in tandem with the semiconductor cycle, and expectations of an uptrend in the cycle or shipment volume will cause its share price to rise.

"With a positive outlook on semiconductor demand, we are bullish on semiconductor shipment volumes and AEM," DBS said.

The brokerage added that worldwide semiconductor shipment volumes bottomed in April this year, and have been on a recovery trend since.

The Business Times reported last week that investors are piling into Singapore stocks exposed to the chipmaking segment, with shares of UMS Holdings, AEM Holdings and Frencken Group averaging a 21 per cent gain this month.