AEM Holdings Ltd: AEM's thermal control offering selected as plan of record for a fabless provider
- Fabless firm selects AEM’s thermal control solution for advanced SLT insertions
- Growth in new customer contributions have been factored into our estimates at c.9%/23% of FY24/25 revenue
- Don’t lose sight of the bigger picture; traction in new customers picking up but test spend from key customer remains uncertain
- Maintain HOLD with TP S$2.26
Fabless firm selects AEM’s thermal control solution for advanced SLT insertions. The fabless provider is primarily in the high-performance computing and artificial intelligence space. The press release also reveals that these advanced thermal engines will be used for next-generation AI devices, with the initial deliveries expected in FY24. Given that the thermal control solutions will be for next generation devices, the timing of the potential ramp hinges on the market’s receptivity to the new product and overall market demand. We had anticipated more of such announcements as AEM guided for revenue from new test insertion wins to triple digit millions in FY25. We have thus already factored in growth of new customer contributions at c.9% of revenue in FY24 (C.$40m) and c.23% of revenue (c.S$145m) in FY25 in our estimates, close to 4x jump vs management’s estimate of 5x surge. In total, AEM has five new customers – one in memory, two in xPU, and two in systems & hyperscalers. We estimate high-single digit growth in new customer contributions in FY24 (albeit from a small base), which we believe will primarily comprise memory related revenues given the upcycle in memory. Contributions from new xPU and systems & hyperscalers customers in FY24 will be comparatively minor, as they are currently at the production intercept stage. As such, we are of the view that the tide will not turn until FY25 when xPU and systems & hyperscalers customers are expected to enter into the ramp stage.
Don’t lose sight of the bigger picture; traction in new customers picking up but test spend from key customer remains uncertain. Mid last year, Intel identified total savings opportunity of $4-5b annually, with financial savings from test estimated at $500m per year by eliminating non-standard tests. We had previously highlighted that the adoption of the Internal Foundry model which reflects test costs directly on the P&L of the various business units could create some uncertainty for AEM. A recent presentation on Intel’s new reporting structure also shows that test times for a next generation client product is down 75%, in contrast to our initial expectations that test times could stay resilient as it is usually elongated during node migration. We believe that a possible reason for this outcome could be that the scope to reduce test times outweigh the need for higher test times that comes with node advancements given that Intel’s test times are 2-3x more than its peers. This will be the key risk for AEM under the assumption that test times will decline across the board for Intel’s product portfolio. While we believe that AEM’s share of revenue from Intel could decline to c.45% in FY24/FY25 from c.50% in FY23, AEM is still highly dependent on its key customer. AEM is currently trading at c.13x blended FY24/25 earnings, and we do not expect the stock to rerate to 16-17x around mid-2022 when the ramp of new equipment for the key customer led to record profits. With no ramp-up of new generation equipment for the key customer in the next two years in addition to risks to test spend arising from the key customer’s expense discipline, we reiterate our HOLD call on AEM with TP S$2.26.
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