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AEM Holdings Ltd. — a chip-testing equipment provider that counts the U.S. tech giant as its main customer — has surged 50% this year to become the top performer in the 107-member FTSE ST All-Share Index, the broadest measure for Singapore stocks. All four analysts covering the stock have an equivalent of a buy rating on it, and on average expect it to gain more than 20% over the next 12 months, according to data compiled by Bloomberg.
This puts it in the running to be the best performer on the index for four of the past five years, as Intel further expands into data centers, autonomous vehicles and next-generation technology. And as pandemic-induced remote working arrangements become more commonplace, demand for chips is set to remain high. Gartner (NYSE:IT) Inc. estimates the global semiconductor industry to log more than $400 billion in revenues this year, just down 0.9% from 2019.
“We expect the share price to trend toward a new record high” with positive industry developments and data center demand, said Lee Keng Ling, an analyst at DBS Bank Ltd. She upgraded the stock to a buy rating in June. The firm currently has return-on-equity at more than 60%, in stark contrast to the median 8% of its peers, Bloomberg-compiled data show.
Intel typically uses AEM’s machines for its chips for computers, laptops and servers, said Kenny Tan, an analyst at KGI Securities (Singapore) Pte. In March, Intel said that it is delivering more than 90% of its products on time despite the pandemic. That has supported AEM’s revenue guidance of between S$430 million ($309 million) and S$445 million for 2020 — an all-time high.
“More AI, more 5G applications, more telecommuting, more cloud services. Overall the macros look positive to us,” said AEM Chairman Loke Wai San in an interview.
Concentration risk, however, remains a concern for a company that relies on Intel for more than 90% of its revenue. The U.S. technology giant is facing its own set of troubles, with Apple Inc (NASDAQ:AAPL). planning to build in-house processors for Mac and competition increasing for chip technology from the likes of Taiwan Semiconductor Manufacturing Co.
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Looking ahead, the company is scanning markets globally for small acquisition targets that have annual sales of less than $10-$20 million. For now, “the majority of AEM’s market share gain will be tagged to Intel’s growth,” Tan said.
©2020 Bloomberg L.P.
