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Broker's take: Maybank Kim Eng initiates 'buy' on AEM, predicts stronger earnings in 2020

MAYBANK Kim Eng has initiated a "buy" on test handling machine supplier AEM Holdings, as it predicts that a recovery in orders and demand from new customers will drive earnings higher in 2020.

The brokerage's target price is S$1.21, based on 2.9 times the average 2019-2020 price-to-book, 10.6 per cent cost of equity and long-term growth of 2 per cent. As at 11.11 am, AEM's counter was trading up 5.53 per cent at S$0.955.

Analyst Lai Gene Lih believes that while AEM's HDMT test handler (TH) deliveries are expected to be tempered by slower operational fleet replacement this year, orders could pick up in 2020 as AEM's core customer - "a US$215 billion market-cap chipmaker" - completes its capacity expansion in Israel. 

Furthermore, the customer is engaging AEM for a second project, involving a next-generation hybrid solutions product, said Mr Lai.

At the same time, Mr Lai also noted that the customer is still "steadfast in increasing capex for its logic chips, and remains committed in focusing R&D (research and development) on data-centric solutions", despite a softer than expected 2019 outlook.

Intel is understood to be AEM's major customer even though tech contractors such as AEM typically do not disclose the identity of key customers due to confidentiality requirements. 

Demand from new customers are also likely to ramp up production for AEM in 2020. They include telecommunications giant Huawei, which is engaging AEM to test its 5G short-haul cabling links in China.

AEM has also secured two new customers employing its in-house solutions, AMPS and InspiRain.

Mr Lai said: "Given the earnings tailwinds we see for AEM in 2020, we would be 'buy'-ers on dips."