UOB Kay Hian analyst John Cheong has downgraded AEM Holdings AWX -0.26% to &ldquo sell&rdquo with an unchanged target price of $2.87, expecting the company&rsquo s near-term earnings to remain weak.

 

In his June 20 report, Cheong says that AEM&rsquo s one month share price rally of about 30% &mdash which was largely driven by increased interest in artificial intelligence (AI) related stocks &mdash is overdone.

 

In late May, chip giant Nvidia&rsquo s strong sales forecast caused a sharp share price rally among semiconductor-related stocks including AEM. Despite the possible longer-term benefits from the secular growth in the semiconductor sector on the back of increasing adoption of AI-related chips, the global semiconductor demand is expected to be weak in 2023.

 

Cheong notes that AI-related chips account for only a small share of about 3% of the total semiconductor sales, with other segments expected to contract in 2023. This will not be able to lift global semiconductor sales out of decline for this year.

 

Citing BCA Research&rsquo s June review of major semiconductor consuming sectors, there is a subdued picture for global semiconductor demand for two major segments. Devices &mdash such as mobile phones and tablets which account for about 40% of semiconductor sales &mdash are seeing sluggish consumer demand due to overconsumption in previous years.

 

Meanwhile, the semiconductor demand for automobiles, servers and industrial electronics &mdash which accounts for about 30% of the sales &mdash will experience less than 5% growth in 2023. This will not be enough to offset lower demand in the consumer electronic goods sector in the near term, Cheong highlights.

 

Even after cutting his FY2023 earnings estimates significantly after its 1QFY2023 ended March results, AEM&rsquo s first quarter earnings still forms only 20% of UOBKH&rsquo s full year earnings estimate.

 

&ldquo AEM&rsquo s 1QFY2023 earnings of $15.6 million were below our expectations. This was due to weak net margin, which fell 5.4 percentage points y-o-y to 10.2% in 1QFY2023, due to change in product mix as revenue contribution from the high margin consumables segment fell, and revenue from the services segment, which has lower margin, rising 53% y-o-y,&rdquo adds Cheong.

 

He further notes that AEM&rsquo s latest guidance in 1QFY2023 indicates an uncertain near-term outlook. The company has maintained its 2023 revenue guidance of $500 million, indicating that it may be revised up or down as second half visibility becomes clearer.

 

Moving forward, the chances that global semiconductor producers&rsquo stock prices will continue to rally through the second half of the year are low, Cheong points out. This is as the surge in AI chip demand only helps a few companies while the boom in smartphone chips benefitted a much larger pool of semiconductor players.

SEMICONDUCTOR equipment maker AEM Holdings : AWX 0% posted a 61.8 per cent drop in net profit to S$15.6 million for the first quarter ended Mar 31, 2023, from S$40.8 million the year before.

 

This comes as the group&rsquo s revenue for the quarter fell 41.7 per cent to S$152.7 million, from S$261.9 million in the preceding year-ago period, the mainboard-listed company said in a regulatory filing on Thursday (May 11).

 

The company noted that the &ldquo exceptionally high&rdquo revenue recorded in the year-ago period was due to &ldquo volume ramp-up to support our key customer&rsquo s new platforms&rdquo , with this starting to taper off in the third quarter of last year.

 

&ldquo The completion of this volume ramp-up, coupled with the slowdown in the semiconductor industry in general, resulted in the decrease in both Q1 2023 revenue and profit before tax,&rdquo the company added.

 

As at Mar 31, 2023, the group maintained a &ldquo healthy balance sheet&rdquo with total assets standing at S$809.8 million, compared to S$805.6 million as at Dec 31, 2022.

 

Cash and cash equivalents fell to S$110.1 million at the end of the first quarter, compared to S$127.8 million at the end of the fourth quarter. This was mainly due to changes in working capital, said AEM.

 

In the near term, the group sees a &ldquo flickering of positive signs&rdquo across the semiconductor industry. &ldquo Technology nodes are continuing to advance as two of the world&rsquo s most advanced foundries are forecasting new process nodes to be up and generating revenue in the second half of 2023,&rdquo said the company, and this is expected to drive demand for new test capability.

 

Beyond 2023, AEM is positive that the future of the industry &ldquo has never been more promising&rdquo .

 

&ldquo The recent excitement over Generative artificial intelligence (AI), such as ChatGPT, is fuelling the demand for AI-focused semiconductor devices to enable these solutions to be delivered to the masses at economically feasible rates,&rdquo it said.

 

Said chief executive Chandran Nair: &ldquo Given the expected decline in testing equipment spending this year, we are taking proactive steps to lower operating costs and drive operational efficiency, while doubling down investments in engineering and R& D in critical areas.

 

&ldquo As we navigate short-term headwinds, we are accelerating our development of Test 2.0 solutions that will be our key driver of growth in the coming years,&rdquo he added.

 

DBS Group Research has upgraded its call on mainboard-listed AEM Holdings : AWX +6.51% to &ldquo hold&rdquo from &ldquo sell&rdquo , in anticipation of a chip market rebound in 2024.

 

The brokerage also raised the target price of AEM&rsquo s shares to S$3.35. This is pegged to 10 times the company&rsquo s forecast FY2024 earnings and is close to its historical mean. 

 

Analyst Lee Keng Ling said on Tuesday (May 2) that the near term remains &ldquo fundamentally challenging&rdquo for the semiconductor solutions provider, as headwinds in the industry persist. Moreover, Intel, a key customer of AEM, posted lacklustre results for the first quarter of 2023 amid a data centre and personal computer (PC) slump. 

 

However, Lee noted that AEM&rsquo s inventories for Q1 have depleted significantly, which suggests that it is near the trough. 

 

Full-year guidance by chip industry bellwethers has also affirmed a rebound from the second half of this year.

 

Furthermore, Intel&rsquo s Q2 revenue guidance indicates that the PC market is bottoming, although there could be some softness in server demand. 

 

&ldquo With the key customer prospects improving and increasing visibility on H2 2023, we now believe that AEM is likely to make upward revisions to its conservative guidance,&rdquo said Lee. 

 

The brokerage has revised its forecast earnings estimates for AEM upwards by 30 per cent for FY2023 as the company&rsquo s inventories and visibility improve.

 

Beyond optimism of a recovering chip market, Lee noted that AEM is currently one generation ahead of its competitors in providing system-level test (SLT) solutions, and believes it is &ldquo well-positioned to ride on the growing SLT market&rdquo .

 

He added that as new technology such as artificial intelligence drives growth in test spend, it would lead to greater demand for AEM&rsquo s offerings in the long term.

On Mar 2, the Employees Provident Fund Board&rsquo s (EPF) deemed substantial shareholding in AEM Holdings : AWX +0.7% crossed above the 9.00 per cent threshold.

 

Previously, the EPF&rsquo s deemed substantial shareholding in AEM Holdings crossed above the 8.00 per cent threshold in October 2022, and above the 7.00 per cent threshold in July 2022, and above the 6.00 per cent threshold and 5.00 per cent substantial shareholder threshold in June 2022.

 

THE earnings of semiconductor equipment maker AEM fell 30 per cent to S$44 million for the second half ended December 2022, from S$62.4 million the year before.

 

H2 revenue dropped 12 per cent to S$330 million, from S$373.2 million previously.

 

Earnings per share (EPS) slipped to S$0.1423 for the six months ended Dec 31, 2022, from S$0.2078 for H2 FY2021.

 

Despite the slowdown in the second half, AEM&rsquo s full-year revenue climbed 54 per cent to a record high of S$870.5 million for FY2022, while earnings were 38 per cent higher at S$126.8 million.

 

However, the group warned that the weakness in H2 may continue into FY2023 due to &ldquo a confluence of factors such as a global slowdown&hellip (and) rising interest rates that adversely impact capital expenditure&rdquo .

 

In a bourse filing on Friday (Feb 24), the company said that its management &ldquo is providing a target revenue guidance for FY2023 of S$500 million that may be revised as second-half visibility becomes clearer&rdquo .