Brokers’ take: UOBKH downgrades AEM to ‘hold’ on weaker chips industry outlook

WANING sentiment in the semiconductor industry has led UOB Kay Hian (UOBKH) to downgrade its call on AEM Holdings to "hold" from "buy" while cutting its target price on the stock to S$5.02 from S$5.60.

The lower price target comes on the back of a lower price-to-earnings multiple, which analyst John Cheong said is to capture the potential decline in industry sentiment as more global players such as Intel caution for a weaker near-term outlook.

In a report on Tuesday (Aug 16), Cheong said he nonetheless remains positive on AEM as he believes the semiconductor equipment maker's new back-end testing equipment would benefit from demand from Intel's new fabrication plants. The US tech giant's older fabrication plants would continue contributing to steady demand for AEM's consumables and services as well as equipment upgrades, he added.

Cheong also noted that AEM's H1 FY2022 earnings came in above expectations to form 75 per cent of UOBKH's full-year estimate, with the management now targeting to achieve a higher full-year revenue of S$750-800 million compared to S$700-750 million previously.

This revised target remains strong despite Intel's more-bearish guidance in late July, said Cheong, as Intel slashed its FY2022 revenue guidance by around 12 per cent after reporting weaker-than-expected financial results.

To account for higher management revenue guidance for FY2022, UOBKH has raised its revenue estimates for AEM by 10 per cent to S$792 million in the current fiscal year. It increased estimates for FY2023 and FY2024 by 2 per cent each to S$828 million and S$853 million, respectively.

Cheong also likes the stock for its continued investment in research and development (R&D) and engineering capabilities.

"AEM has embarked on expansion with new R&D labs and better manufacturing facilities in its key geographies like Singapore, Malaysia and the US. This will also bring AEM's operations closer to its existing and potential customers," the analyst noted.

Shares of AEM were trading flat at S$4.62 as at 9.50 am on Tuesday.

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