Recent sell-offs on AEM and UMS an opportunity to buy on the dip: Maybank Kim Eng

MAYBANK Kim Eng is of the view that FY2020 earnings for semiconductor-related plays AEM Holdings and UMS Holdings remain intact despite recent market sell-offs amid the novel coronavirus outbreak.

As such, the brokerage has advised clients to take the opportunity to accumulate on the dip.

For test handler AEM, which earns 90 per cent of its revenue from Intel, demand for its high-density modular test (HDMT) test handlers are highly co-related to the semiconductor giant's capacity expansion and new product launches.

Thus, Intel's plans to increase capacity by 25 per cent along with the launch of nine 10nm processors in 2020 are a positive, said Maybank Kim Eng analyst Lai Gene Lih.

Moreover, production is already underway at AEM facilities in Singapore and Malaysia for orders secured in the fourth quarter of 2019.

"As we do not see supply or demand disruptions, we believe Q1 FY2020 earnings are intact," Mr Lai noted.

That being said, a key risk for AEM is the difficulty in sourcing input materials if there are prolonged supply chain disruptions, he pointed out.

In the event AEM does not win new contract orders beyond the S$245 million secured in January for FY2020 and if it only records S$330 million in revenue for FY2021, the fair value of the company's shares will be around S$2.00, according to Maybank Kim Eng's estimate.

This, Mr Lai said, suggests that any direct or indirect impact from the novel coronavirus outbreak has already been priced-in.

Like AEM, UMS has manufacturing facilities in Singapore and Malaysia, minimising the impact of earnings due to the virus outbreak.

The precision engineering firm is currently riding tailwinds of the global semiconductory recovery. Its key client, US-listed Applied Materials has also said memory investment is showing early signs of a recovery.

If the recovery is delayed, Maybank Kim Eng has estimated the fair value of UMS's stock in its bear case scenario as S$0.96.

A risk to UMS is if the novel coronavirus affects demand of 5G smartphones, which is a key earnings driver of Applied Materials customers TSMC, Samsung Electronics, SK Hynix and Micron.

Maybank Kim Eng has a "buy" recommendation on AEM with a price target of S$2.58. For UMS, the brokerage has a "buy" call and price target of S$1.13.

As at 3.20pm on Tuesday, shares in AEM were trading S$0.06 or 3.2 per cent higher at S$1.94. UMS was up S$0.02 or 2.1 per cent to S$0.96.