<News Analysis> Key customer’s turnaround likely to be overshadowed by impact from arbitration
- Expect weak 1H23 yoy for AEM; 2H23 revenue recovery intact but sequential improvement in earnings may not play out due to arbitration
- Key customer’s return to profitability and expectations of 2H23 recovery could be positive for AEM
- Industry headed for U-shaped recovery, evidenced by trend in semiconductor shipments
- We currently have a HOLD call with TP S$3.35
Expect weak 1H23 yoy for AEM; 2H23 revenue recovery intact but sequential improvement in earnings may not play out due to arbitration. Not much details have been disclosed about arbitration but the first payment of US$9m is expected to be made in 3Q23 and second payment of US$11m in 3Q24, which accounts for c.14-15% of our forecasts for both years. The payments will be funded by internal resources and there would be no additional payments paid to the complainants (Advantest). Stock has rallied 14% and deviated from our target price since we upgraded to HOLD. We expect a near-term knee jerk reaction on share price as negatives from arbitration might overshadow 2H23 earnings recovery.
Key customers’ return to profitability and expectations of 2H23 recovery could be positive for AEM. Intel’s 2Q23 revenue came in at $12.9b (-15% yoy) which exceeded the streets’ estimates of $12.1b and was $0.9b above April’s outlook. Non-GAAP EPS was down 54% yoy at $0.13 but surpassed analyst expectations of a loss of $0.04 per share and was $0.17 above April’s outlook. Intel is expecting a modest 2H23 recovery. 3Q23 revenue and EPS guidance is at $12.9-13.9b and $0.20, which is better than the market’s expectation of $13.2b and EPS of $0.16. We see two possible scenarios for AEM. (i) The return to profitability frees up more cash for its heavy capital spending which is likely to flow through to AEM. (ii) On the flipside, the return to profitability can also be attributed to operational efficiencies which is likely to see $3b in cost savings in 2023 and $8-10b exiting 2025. In this regard, there is a risk that the Internal Foundry Model that Intel has adopted could create some uncertainty for AEM as test costs are now reflected directly on the P&L of the various business units. Nonetheless, we still see resilient demand for test as Intel executes on its 5 nodes in 4 years strategy, noting that test times are generally elongated during node migration.
Industry headed for U-shaped recovery, evidenced by trend in semiconductor shipments. The trend in semiconductor shipments shows the industry moving towards the right side of the U-shaped recovery. Semiconductor shipment growth has turned more positive in May, recording m-o-m growth of 2% compared to 0.3% the previous month. Semiconductor shipments in May are still down 21.1% yoy however it recorded a slight improvement from –21.6% yoy in April. Overall, easing of inventories are expected to support the upturn in semiconductor shipments and drive recovery in 2H23.
Source: CEIC, SIA, DBS Bank
We currently have a HOLD call with TP S$3.35, more updates to come (if any) after the analyst briefing today.