Not spared from the downturn
Intel plans to reduce headcount to cope with weakening demand in personal computers. It was reported that Intel is planning a major reduction in headcount, likely numbering in the thousands, out of about 113,700 employees as of July, to cut costs and cope with weakening demand in the personal computer market. On the back of the rising inflation, risk of recession, and possibility of oversupply in chips due to the massive capex plans by the chip makers, tech companies are facing increasing headwinds.
Hot semiconductor sales to turn cool. According to forecasts by Gartner, overall semiconductor revenue will grow 4.0% in 2022 followed by a 3.6% decline in 2023 (vs previous forecasts of 7.4% and -2.5%). Forecasts have been revised down to account for a deterioration in the macroeconomic environment and weakening consumer demand. Thus far, we have also seen decelerating growth rates in semiconductor shipments. As of August 2022, global semiconductor shipments came in at US$47b, registering a meagre 0.1% y-o-y growth. The downtrend in growth rates have been observed since the start of the year and growth is likely to tip into negative territory as the global macroeconomic outlook weakens.
PC one of the most affected segments. Demand for electronic devices has been relatively weak in recent months. Overall, we continue to expect a drop in shipment for the various consumer devices in 2022, after a stellar performance in 2021 due to the COVID pandemic, with PC segment being one of the weakest. PC shipment is expected to drop 14.5% y-o-y this year, and another 3.3% drop in 2023, according to Gartner.
Prolonged weakness for Intel could affect AEM. A prolonged weakness for Intel could ultimately affect AEM. AEM derives about over 60% of the group revenue from its key customer, Intel. At the earnings level, contribution from Intel is higher as the other segments, including CEI Ltd, which AEM acquired in 2021, have generally lower margins. In terms of shipment, the consumer device markets such as PCs, mobiles and tablets are expected to see a recovery only in 2024. We do not expect the new customer wins in 1H22 to wholly cushion the weakness from Intel as their contributions are relatively small compared to Intel and contributions are only likely to come in the end of FY23 or early FY24.
Potential for further capex cuts by Intel, AEM’s key customer. In a bid to cut costs amid a slowing PC market, Intel is planning for a major reduction in headcount. Earlier this year in July, Intel had already slashed FY22F non-GAAP capex guidance by $4bn to $23bn and we think that there is a risk that Intel may further reduce its capex spending given the PC market slowdown. Higher capital expenditure by Intel is a key revenue driver for AEM and has historically led to a greater demand for AEM’s test handlers. The converse is true which dampens the outlook for FY23. On the brighter side, we are still estimating 29% earnings growth in FY22 due to the ramp up of next generation handlers.
Expect weaker 2H22 vs 1H22. We expect AEM to report revenue of S$798m for FY22F, vs AEM’s guidance of S$750m – S$800m. This implies a weaker 2H22 as 1H22 revenue was already S$540m. The stellar 1H22 performance was mainly due to the strong demand of the new generation equipment and tools that were launched in 2H21. For the full year FY22F, we expect earnings to grow 29% y-o-y, after a weak FY21A where earnings dropped 6%.
Long term outlook still strong with structural trends intact. We believe that AEM is well positioned to ride on the growing SLT (system level test) market that has benefited from increased complexity of chips and increased test coverage requirements, alongside the need for advanced heterogeneous packaging.
Earnings and recommendation
Downgrade to HOLD with lower TP of S$3.19, from S$5.88 previously. We have reduced our revenue forecasts by 1.7% and 19.9% for FY22 and FY23 on the weaker outlook for AEM’s key customer. Accordingly, we have also reduced our earnings forecasts by 1.6% and 19.7% in FY22/FY23 in line with lower toplines. We roll forward our valuation to FY23F and our TP is pegged to 9x (vs 15x, +2SD previously), at the 5-year average PE given the overall weaker macroeconomic outlook and a slowing global PC market.