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Hot stock: AEM Holdings dives 25% as CGS-CIMB downgrades stock, slashes target

SHARES of AEM Holdings continued plummeting on Wednesday, losing almost a quarter of their value as CGS-CIMB downgraded the stock to "reduce" on sharply lower 2019 estimates.

As of 4pm, AEM was trading down 24.5 per cent, or 24.5 Singapore cents, to 75 Singapore cents amid heavy volume of some 18.9 million shares that made it one of Wednesday's most active stocks. In the wake of Tuesday's 19.5 Singapore cent drop, the stock has lost almost 40 per cent, or S$119 million, of its market value in just two days.

The two-day decline wiped out nearly all the gains that the stock has made since the start of 2018. It peaked at S$1.90 in mid-March.

The stock's plunge began on Tuesday after the company guided for "significant volatility" ahead despite a second-quarter net profit of S$9.5 million, up 15.6 per cent year on year.

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In a note on Wednesday, CGS-CIMB analyst Willian Tng downgraded the stock from "add" to "reduce", citing the company's poor earnings visibility for 2019. He also slashed his target price for the stock to S$0.69 from S$1.78 previously.

Underlying the pessimism about the stock is concern about the order outlook from Intel, which is understood to be AEM's major customer even though tech contractors like AEM typically do not disclose the identity of key customers due to confidentiality requirements. In May, Bloomberg reported that Apple was planning to use its own chips to replace processors from Intel Corp as early as 2020. Intel draws about 5 per cent of its annual revenue from Apple and is a major customer of AEM.

AEM has said the initial ramp-up phase of its equipment at its customer sites will be completed by the end of Dec 2018, following which AEM expects a rolling upgrade phase which could "introduce significant volatility" in its business.

Wrote Mr Tng: "Our current thesis that its major customer will replace its legacy generations of Test Handler (TH) with AEM’s new TH remains intact. However, given that the ramp-up phase in demand from its customers is likely over, the timing and occurrence of such replacements are less clear.

"As such, we believe that AEM's earnings will peak in FY2018 and decline year-on-year in FY2019."