Stand on the sidelines for now
9M23 earnings miss; recovery likely deferred till late 2024
- 9M23 earnings of S$3.5m (-96.9% y-o-y), 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 lower FY23F earnings by 33% and FY24F revenue/earnings by 19%/23%
- Maintain HOLD with lower TP S$3.00 (vs. S$3.11 previously)
9M23 revenue of S$387.0m (-48.2% y-o-y), largely in line with expectations. 9M23 revenue weakness is largely attributed to customers pushing out their test-related capex to 2024 and beyond, amid an industry downturn along with an absence of a ramp-up in products vs. 9M22. 3Q23 and 9M23 revenue account for 22.9% and 79.5% of our estimates, respectively. For 9M23, services (+18.3% y-o-y), which primarily consist of contract manufacturing, were more resilient compared to consumables (-60.6% y-o-y) and equipment (-80.6% y-o-y). AEM also maintains its revenue guidance of S$460-S$490m.
9M23 earnings of S$3.5m (-96.9% y-o-y), below our estimates even after accounting for one-off arbitration expenses of S$26.7m. 9M23 earnings account for 17.4% of our estimates. 9M23 net profit margin of 0.9% took a hit, as AEM fully recognised the arbitration expenses in 3Q23. Excluding this significant one-off, the profit before tax (PBT) 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.
Worst is likely over in terms of earnings, 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 will be down slightly (-3.4% y-o-y), whereas memory-related capex will rebound (+12.4% y-o-y). Consensus estimates for Intel are not too far from the general narrative, with capex set to fall 6.7% y-o-y in 2023 and stay flattish at +1.0% y-o-y 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-up of new-generation equipment. As yet, we do not expect a ramp-up in new-generation equipment for the key customer in the next two years, as the capability requirements for the next two to three years have been met. Meanwhile, engagements with new customers continue to progress with ramp-ups expected in 2H24.
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 that are expected to be converted to revenue in the next 1-1.5 years and possibly skew its top lines in FY24/FY25. While new customer ramp-ups could be expected from 2H24, we do not have much visibility as to the magnitude of it. We also do not expect a ramp-up 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 the systems-level test segment and unique Test 2.0 approach. AEM has also been awarded three new patents in 3Q for its thermal capabilities, reinforcing its competitive advantage. The long-term secular drivers of semiconductor tests such as artificial intelligence, Internet of Things, and 5G remain intact.
Maintain HOLD with lower TP S$3.00 (vs. S$3.11 previously). Our target price is pegged to 12.5x FY24F earnings, 0.2SD below the historical mean on a delay in the recovery of earnings (vs. 10x at -c.0.5SD of the historical mean previously). We ascribe a higher valuation multiple to AEM in anticipation of a ramp-up towards late 2024 and into 2025, notwithstanding near-term challenges. We lower our FY23F earnings estimates by 33% on weaker-than-expected 9M23 earnings and adjust our FY24F revenue/earnings estimates by -19%/-23%, as its recovery is deferred to late FY24.