Broker's take: KGI says AEM will outperform amid semiconductor slowdown

WITH macro headwinds and slowing sales, this year is a difficult one for most semiconductor players, but not AEM Holdings, which provides advanced chip testing solutions, according to KGI Securities.

For one thing, the slowdown in semiconductor sales is largely confined to memory players, due to overcapacity in the DRAM and NAND markets, said KGI analyst Kenny Tan in a Friday report. In addition, AEM's key customer, Intel, while currently facing stiff competition in its primary markets, "is still likely to continue spending to stay on top".

Intel reportedly accounts for some 80 per cent of AEM's sales. In turn, AEM has claimed to be the sole supplier of test handlers to Intel.

The US chipmaker has plans to shift to seven nanometer (nm) microarchitecture in 2021, and AEM has been conducting research and development for it. The shift towards a new microarchitecture will catalyse sales of both HDMT handlers, as well as new pans, kits and consumables designed for the new chip, the analyst wrote.

In September, AEM also announced sales orders worth S$280 million for delivery in fiscal year 2019, following which the group revised its expected revenue range upwards to between S$285 million and S$305 million for FY2019.

That forecast represents a minimum 8.5 per cent increase on year, Mr Tan said.

The brokerage is initiating coverage on AEM with an "outperform" call and target price of S$1.34 based on 11 times 2020 forecast earnings per share. Global semiconductor test equipment manufacturers are trading at 18 times 2020 forecast earnings per share.

"Our peg thus represents a 39 per cent discount, which we believe lends enough margin of safety to our valuations," said Mr Tan.

As at 3.41pm, shares of AEM were trading at S$1.18, up 1.72 per cent or two Singapore cents.

Maybank Kim Eng and CGS-CIMB, who hold buy calls on the counter, have price targets of S$1.50 and S$1.23 respectively.