AEM Holdings: 5 Reasons to Buy This Singapore Tech Stock

May 31, 2022

The Singapore stock exchange is not spared from the stock market volatility in 2022.

While the Strait Times Index (STI) has managed to record a 4.4% year-to-date return, it has fallen by about 4.5% over the last two months.

One of the companies that has been severely affected by the recent selloff in the stock market is AEM Holdings Ltd (SGX: AWX), which is a semiconductor company based in Singapore.

AEM provides comprehensive test solutions for the semiconductor and electronics sector and has manufacturing plants located in Singapore, Malaysia, Indonesia, Vietnam, China and Finland.

Just like what we’ve seen with the global technology stocks, AEM’s share price has been on a downtrend in 2022.

In fact, AEM has seen a decline of 14.3% in its share price to its current level of S$4.51. Is this a good buying opportunity?

Here are five reasons why investors should buy this Singapore tech stock.

1. Strong earnings

AEM has reported strong earnings growth in its latest Q1 FY2022 earnings results.

Revenue for the quarter jumped by 224% year-on-year (yoy) to S$261.9 million as compared to S$80.2 million.

Similarly, net profit surged by 205.6% yoy to S$40.8 million from S$13.3 million.

These earnings have easily beaten Bloomberg’s consensus expectations.

2. Strong semiconductor momentum

AEM’s share price performance has a strong correlation with the US semiconductor equipment billing, which is one of the indicators of the semiconductor industry’s strength.

According to Intel Corporation (NASDAQ: INTC), one of the largest customers of AEM, the semiconductor industry could double its market size to US$1 trillion by 2030.

3. Intel’s IDM 2.0 strategy will benefit AEM

Intel has launched its IDM 2.0, a major evolution of Intel’s integrated device manufacturing (IDM) under its new CEO, Pat Gelsinger.

With Intel’s new fabrication plants, demand for AEM’s new back-end testing equipment will grow.

To put this into perspective, Intel will be investing US$7 billion on a new chip plant in Malaysia.

Meanwhile, the older fabs will also help to contribute to a steady demand for AEM’s consumables and services as well as equipment upgrades.

4. Management increased its revenue guidance

AEM has also raised the high end of its FY2022 revenue guidance by S$30.0 million to S$750.0 million, from S$720.0 million previously.

The upward revision is mainly driven by its semiconductor business.

Given the  visibly larger customer orders placed this year, the upward revision has a strong basis.

The management also highlighted that demand for advanced packaging and heterogeneous integration will continue to drive other industries such as automotive, high-performance computing and artificial intelligence.

As the complexity of semiconductor chips continue to increase, this will propel demand for System Level Testing solutions, which will benefit AEM.

5. Low inventory write-down risks

Another positive aspect of AEM is its build-to-order model.

Inventories rose 25% yoy to S$256.2 million in Q1 FY2022 as AEM built up its inventory to support customers’ orders for FY2022 and FY2023.

The increase in inventories is to mitigate the supply chain risk and component tightness.

However, given its business model, the inventory write-down risk is low as these inventories are backed by purchased orders from customers.

AEM has attractive value and offers dividend safety

At its current price, AEM is trading at a price-earnings ratio of 14.3 times with a price-to-book ratio of 3.5 times.

It also has a dividend yield of 2.3%, which is important given the rising inflationary environment.

While downside risks such as delivery delays, aggressive competitive response and loss of sole supplier status or emergence of a new supplier remain, I am positive on the semiconductor industry’s long-term prospects.

Earnings for AEM is backed by strong orders and structural growth story within the semiconductor space. Given that Intel is one of AEM’s major customers, the increase in investment by Intel will keep growth momentum going in the near-term.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is deeply committed to making investment accessible and understandable to everyone, a principle that drives his engagement with the capital markets and his long-term investment strategies. He is currently the Head of Content & Investment Lead for Prosperus and a SGX Academy Trainer. His extensive experience spans roles as an economist at RHB Investment Bank, focusing on the Thailand and Philippines markets, and as a financial journalist at The Edge Malaysia. Additionally, his background includes valuable time spent in an asset management firm. Outside of finance, Billy enjoys meaningful conversations over coffee, keeps fit as a fitness enthusiast, and has a keen interest in technology.

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