9M23 took a hit from arbitration expenses; recovery likely deferred till late 2024
- 9M23 revenue of S$387.0m (-48.2% yoy), largely in line with expectations
- 9M23 earnings of S$3.5m (-96.9% yoy), below our estimates even after accounting for one-off arbitration expenses of S$26.7m
- Worst is likely over, but recovery could be delayed till late 2024
- We currently have a HOLD call with TP S$3.11, more updates to come after the analyst briefing on 10 November
9M23 revenue of S$387.0m (-48.2% yoy), largely in line with expectations. 9M23 revenue weakness is largely attributed customer pushing out their test-related capex to 2024 and beyond, amid an industry downturn along with an absence of product ramp vs 9M22. 3Q23 and 9M23 revenue accounts for 22.9% and 79.5% of our estimates respectively. For 9M23, services (+18.3% yoy) which primarily consists contract manufacturing was more resilient compared to consumables (-60.6% yoy) and equipment (-80.6% yoy). AEM also maintains its revenue guidance of S$460-S$490m.
9M23 earnings of S$3.5m (-96.9% yoy), below our estimates even after accounting for one-off arbitration expenses of S$26.7m. 9M23 earnings accounts for 17.4% of our estimates. 9M23 net profit margin of 0.9% took a hit as AEM fully recognized the arbitration expenses in 3Q23. Excluding this significant one-off, profit before tax margin would have been 11.0% vs 2.6% after exceptionals. Based on our current estimates, AEM would have to deliver S$16.8m in earnings in 4Q23 on revenue of S$100.0m, implying net margins of 16.8%, which could be challenging to attain in our view.
|S$’m||9M23 core||9M23||9M22||Yoy change (%)|
|Profit before tax||42.6||10.1||141.4||-92.8|
|Profit before tax margin||11.0%||2.6%||18.9%||-16.3 percentage points|
|Net profit margin||undisclosed||0.9%||15.4%||-14.5 percentage points|
Source: Company, DBS Bank
|S$’m||3Q23||3Q22||2Q23||Yoy change (%)||Qoq change (%)|
|Profit before tax||-13.7||39.4||4.8||-134.9||-384.4|
|Net profit margin||NM||15.6%||3.4%|
Source: Company, DBS Bank
Worst is likely over, but recovery could be delayed till late 2024. Macros continue to be uncertain and overall industry capex in 2024 is likely to stay conservative (-0.1%) – logic related capex (where AEM’s key customer is) will be down slightly (-3.4% yoy) whereas memory related capex will rebound (+12.4% yoy). Consensus estimates for Intel are not too far from the general narrative, with capex set to fall 6.7% yoy in 2023 and stay flattish at +1.0% yoy in 2024. Our views are largely congruent with AEM’s expectations of a protracted period of lower tester utilisation rates which pushes out capex spend into late 2024. Nonetheless, Intel’s capex, while key, is not the only consideration. AEM is also driven by product cycles such as the ramp of new generation equipment. As yet, we do not expect new generation equipment ramp for the key customer in the next two years as capability requirements for the next two to three years has been met. Meanwhile, engagements with new customers continue to progress with ramps expected in 2H24.
Source: Bloomberg, DBS Bank
Source: Gartner, Inc., Forecast: Semiconductor Capital Spending, Wafer Fab Equipment and Capacity Worldwide, 3Q23 Update Bob Johnnson, et al., 5 October 2023. GARTNER is a registered trademark and service mark of Gartner, Inc. and/or its affiliates in the U.S. and internationally and is used herein with permission. All rights reserved.
Many moving parts with some bright spots, but no strong catalyst in the near-term. AEM has longer-dated non-cancellable purchase orders amounting to c.S$280.0m, expected to be converted to revenue in the next 1-1.5 years and possibly skew top-lines in FY24/FY25. While new customer ramps could be expected from 2H24, we do not have much visibility into the magnitude of the ramp. We also do not expect a ramp of new generation equipment for the key customer in the next two years as the latest generation of products should be able to meet Intel’s capability needs for the next two to three years.
Reiterate long term positive view on AEM. We continue to like AEM for its technological superiority in Systems Level Test and unique Test 2.0 approach. AEM has also been awarded three new patents in 3Q for its thermal capabilities, reinforcing its competitive advantage. Long term secular drivers of semiconductor test such as artificial intelligence, internet of things, 5G remain intact.
We currently have a HOLD call with TP S$3.11, more updates to come after analyst briefing on 10 November.