Why the AEM share price is poised for more gains in 2020

Shares of AEM Holdings, one of the hottest stocks of the moment, continue to move along an all-time high price, two weeks after the company raised its revenue forecast for its 2020 financial year.

AEM raised 2020 revenue guidance by 17%

On 06 May 2020, the semiconductor chip maker’s Executive Chairman Loke Wai San announced that it has received sales orders worth S$416 million for delivery in FY2020.

‘Based on the sales orders received so far and the business outlook going forward, the group is revising its FY2020 revenue guidance upwards to be between S$430 million to S$445 million, and capex (capital expenditure) to remain at about S$4 million,’ the announcement added.

The new guidance represents a 17% increase from its previous higher-end estimate of S$380 million.

Following the announcement, AEM’s share price skyrocketed over 30% to peak at S$3.38 apiece on Monday 11 May 2020.

As at 16:00 SGT on Wednesday 20 May 2020, the AEM stock has trailed off slightly, but still exchanged hands at S$3.11 per share – a 21.5% upside from pre-announcement price points, based on live IG data.

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AEM posted ‘record’ profits and earnings per share in Q1

This guidance revision comes just days after the group’s first quarter financial update for FY2020, in which it posted a ‘record’ 449% jump in profit before tax to S$43.8 million.

AEM achieved a 178.5% year-on-year increase in revenue to S$146.8 million in the first quarter on the back of increased orders from its main customers for tools, consumables, and services. Revenue from tools and machines and revenue from consumables and services accounted for about 53% and 47% of the total revenue respectively.

Even more impressively, diluted earnings per share burgeoned 448.1% to hit S$0.133 per share, up from S$0.024 Q1 2019.

While Covid-19 has affected most businesses everywhere, AEM says it has on the contrary benefitted from the increase in demand for semiconductor chips for servers, PCs and notebooks, thanks to the shift to telecommuting and virtual learning globally.

The company had also reiterated an initial revenue guidance of between S$360 million to S$380 million for FY2020 in the Q1 earnings release, stating that that it is continuing to operate worldwide without significant adverse impact from Covid-19 measures.

Analysts raise their share price targets to as high as S$4.04

In light of the earnings update, analysts from DBS, CIMB and Maybank have raised their 12-month share price targets for the AEM stock.

DBS’ equity research team increased their price target to S$2.87 per share from S$2.47 previously. However, they maintained a ‘hold’ recommendation on the stock citing a preference to ‘err on the side of caution amid the weak economic backdrop caused the Covid-19 pandemic’.

CIMB analysts maintained an ‘add’ rating alongside a higher share price target of S$3.58 (from S$3.10 a share previously). They stated that the new guidance did not come as a surprise, as the company was ‘overdue for an order book update’ since the last one was made on 25 February.

They also noted that with Intel – AEM’s key customer – still on track to delivering the 10th Gen Intel® Core™ S-series desktop processors by May 2020 (including Intel’s flagship Core i9-10900K processor which the company claims is the world’s fastest gaming processor), plus the newly-acquired mobility-as-a-service solutions provider Moovit, there is a combined added opportunity totalling more than US$230 billion by 2030 for semiconductor firms like AEM.

Maybank analysts also remain positive on the stock, providing the highest price target of the lot at S$4.04 per share.

They wrote that while Intel’s ‘more disciplined’ approach to its 2020 capex likely points to slight downside regarding its US$17 billion guidance earlier in the year, it emphasised that spending for 10, 7 and 5nm will remain on schedule – a boost for AEM’s prospects.

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New US ruling could affect AEM’s sales

However, they also noted some potential risks for AEM investors in the form of new rules announced by the US Department of Commerce requiring any chipmaker using US technology to get a license before they can sell to Chinese phone manufacturer Huawei.

If the ruling successfully limits Huawei’s access to critical chips and rollout of 5G infrastructure in China, this may also affect the rate of growth of AEM’s test and measurement solutions business – although this is estimated to be less than 5% of AEM’s FY2020 sales.

Other risks, Maybank added, include a weaker-than-expected momentum in order win or delay in Intel’s 7nm process in FY21 for AEM.

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