AEM Holdings Ltd: Laying the foundation for future growth
FY24 earnings came in at SGD11.6mn on revenue of SGD380.4mn (-21% y/y), ahead of our expectations. FY24 revenues were back-loaded, with 2H24 revenue of SGD206.8mn (+0.4% y/y, 19.2% h/h) coming in at the higher end of the guidance of SGD190-210mn. FY24 test and automation equipment revenue grew 92% y/y to SGD105.1mn as key customer Intel pulled in orders under the non-cancellable long dated PO (purchase order) programme. However, this was unable to offset the 44% y/y decline in consumables revenue, which is due to lower utilisation and reduced design activity at Intel, as well as the c.30% y/y drop in contract manufacturing revenue on ongoing inventory digestion in industrial markets. FY24 gross margins contracted 1.2ppt y/y to 25.7% on the back of lower revenue, but AEM was able to return to profitability with net income of SGD11.6mn in FY24 in the absence of arbitration settlement expenses of SGD26.7mn recorded in the prior year.
Guidance signals a subdued 1H25, largely due to timing factors. Management guided for 1H25 revenue between SGD155-170mn, with the midpoint representing a 6% y/y decline, and accounts for c.44% of our revised FY25 revenue estimate. Reasons cited for the decline included a significant revenue pull of c.SGD50mn from FY25 to 2H24, and to a lesser extent, some customer pushouts in system shipments into 2H25.
A stronger 2H25 is expected, driven by a recovery in contract manufacturing and potential product ramp-ups. Looking ahead, we anticipate a stronger 2H25, driven by the ramp-up of key customers' devices and some recovery in the contract manufacturing segment. The AI customer’s pushout of system shipments into 2H25 also alludes to a better 2H25, given that their data centre sales will be flattish h/h in 1H25 and production ramp-ups of its upcoming product will only occur from mid-year onwards.
Customer diversification remains on track, but some patience needed as AEM lays the foundation for future growth. AEM expects revenue from new test cell solutions customers to exceed SGD100mn in FY25. We pare back our estimates for new customer contribution from SGD150mn to SGD130mn, given the cuts in consensus revenue estimates at the new fabless AI customer, which may point to lower-than-expected end volumes. Nonetheless, we see the foundation for future growth being laid with new project wins and increased engagement with new customers. Notably, there was an additional project win in 4Q24 with the AMPS-BI product slated to test next-generation standard data centre devices for the company’s new fabless AI customer. The PiXL thermal management solution is also deployed at the AI customer while the memory customer has expanded its installed base for GDDR6 device testing. Further, the market is expecting a ramp-up of AI and GDDR 7 devices in late 2025, which could potentially benefit AEM if they can service the memory customer’s GDDR7 products.
Notwithstanding shifts in order fulfilment timing, non-cancellable POs provide a lifeline for AEM, even as the key customer navigates choppy waters. Intel faces mounting pressure to improve profitability despite significant operating losses at the Intel foundry, market share erosion from intensifying competition, macroeconomic uncertainty due to tariffs, and a widening gap in the AI accelerator race. Yet, we believe that declines in contribution from the key customer will be somewhat cushioned by non-cancellable POs which work on a “take or pay” arrangement and will be drawn down through to 2H27. These non-cancellable POs mainly cover equipment and pans, which should hold up demand for those goods in the mid term. Also, the 56% h/h decline in consumables sales to SGD22.3mn in 2H24 should already be reflective of lower volumes and variants at Intel, and we believe that this should pick up across FY25 as Intel executes its product roadmap. Most of the contributions from Intel in 1H25 should therefore be from consumables and services, bearing in mind that there were substantial equipment pull-ins to 2H24.
Maintain BUY with lower TP of SGD1.69 (vs. SGD1.72 previously). We roll over our valuation to blended FY25/26F earnings to better reflect the ramp-up in new customer contributions. Our peg remains the same at 20x earnings. We reduce our FY25/26 revenue estimates by 8%/4% to reflect lower than previously expected contributions, mainly from new customers. FY25/26 earnings estimates are also reduced by 27%/17% to reflect lower margins from lower operating leverage and lower contributions from higher margin products. Overall, we believe that the foundation for future growth is being laid, but it could take some time for this to be reflected in the financials, especially given the unfavourable comparison in FY25 on a material pull-in of orders into FY24.
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