Strong And Sustained Rebound In Orders To Drive Share Price Gains
We expect aggressive capex by Intel and the set-up of the new Intel Foundry Services
business to lead to sustained demand for consumables for older machines, while new
fabs will lead to more orders for test equipment. We have not factored in new customers
from whom AEM expects more meaningful contributions from 2022 onwards, while the
acquisition of component manufacturer CEI Limited will drive meaningful cost savings.
Initiate coverage with BUY and target price of S$5.60.
• System-in-Package design shift to revolutionise semiconductor manufacturing. Key
customer Intel Corporation’s (Intel) March IDM 2.0 strategy is a major bet that future
demand and profitability lie in the packaging of modular dies (or chips), known as “tiles”,
which can squeeze more compute within a single package. Driving towards that goal, Intel
intends to build new fabrication plants (fabs) for these new “tiled” chips, and is expected to
outsource the production of certain modules. Existing capacity has also been earmarked
for the foundry services market.
• Sustained demand for AEM’s total portfolio. Intel’s decision to maintain old fabs and
build new ones means that AEM will enjoy: a) steady demand for its consumables and
services, b) recurring but cyclical demand for equipment upgrades at Intel’s old fabs, and
c) demand for new equipment to test the new “tiled” chip products. That said, AEM
provides mainly backend test equipment, where demand typically comes 6-9 months
following the installation of front-end equipment at the new fabs. Additionally,
management expects engagements with 10 of the top 20 global semiconductor
companies to result in meaningful revenue contributions in 2H22 and beyond.
• Acquisition of CEI to lead to cost savings. We further estimate AEM to generate
meaningful cost savings at the gross level of S$5.6m-9.0m a year, by in-sourcing some of
its production activities to CEI Limited (CEI). At the entity level, CEI is expected to also
contribute S$4.0m 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.
• Initiate coverage with BUY. We value the company at S$5.60/share, implying 15.6x
2022F earnings. Our valuation is at a premium to the Singapore peer average forward PE
of 10.1x. More direct competitors listed in the US and Japan trade at an average of 18.8x
forward earnings.