UOB Kay Hian (UOBKH) on Wednesday (May 4) initiated coverage on AEM Holdings : AWX 0% with “buy” and a target price of S$5.60, as it anticipates a “strong and sustained rebound” that will drive share price gains.

UOBKH’s new target price values AEM at 15.6 times the company’s FY2022 earnings. The valuation is at a premium to the company’s Singapore peer average forward price-to-earnings of 10.1 times. This implies a potential upside of 15.7 per cent from AEM’s last trading price of S$4.84 on Wednesday as at 11.13 am. AEM was trading 0.6 per cent or S$0.03 higher at the time.

The research team raised its target price as it expects Intel – one of AEM’s key customers – to have aggressive capital expenditure with the set-up of the new Intel Foundry Services business. Intel intends to build new fabrication plants (fabs) and will likely outsource the production of certain modules.

Intel’s decision to maintain old fabs and build new ones means that AEM will enjoy sustained demand for consumables for older machines, while new fabs will lead to more orders for test equipment.

Additionally, the research team expects AEM’s acquisition of component manufacturer CEI to drive meaningful cost savings at the gross level of S$5.6 million to S$9 million a year, by insourcing some of its production activities to CEI. At the entity level, CEI may contribute an estimate of S$4 million a year of incremental net profit to the overall group.

“We believe our estimates are conservative as we have not factored in further upside from capacity expansion in CEI’s box-build business,” said UOBKH analyst Clement Ho.

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While UOBKH has not factored in new customers from whom AEM expects more meaningful contributions from 2022 onwards, the analyst estimates AEM’s 2022 full-year revenue to come in at S$720 million from S$566 million a year ago — at the top end of the range guided by AEM.