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.
INITIATE COVERAGE
• 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.