UMS Holdings - DBS Research 2017-05-23: Hot Chips

UMS Holdings - DBS Vickers 2017-05-23: Hot Chips UMS HOLDINGS LIMITED 558.SI

UMS Holdings - Hot Chips

  • Maintain BUY with higher TP of S$1.33 as we raise conviction on more positive industry data.
  • Key client Applied Materials sets new earnings record for its fourth consecutive quarter and expects to grow sustainably above industry - which augurs well for UMS.
  • To capture the growth potential arising from the strong semiconductor uptrend, we impute a higher valuation peg of 11x FY18F PE vs peers’ 14x.
  • As a dividend play, the stock's attractiveness is further enhanced by the prospect of higher dividends.



Maintain BUY with higher TP of S$1.33; conviction raised as positive data and outlook for key client Applied Materials augurs well for UMS. 

  • SEMI predicts that global fab equipment spending could reach an industry all-time high of over US$46bn in 2017, before climbing closer to US$50bn in 2018.
  • Just days ago, Applied Materials – a leading producer of semiconductor equipment and key client of UMS – announced record earnings for its fourth consecutive quarter as the industry benefitted from strong order momentum, and remains confident in growing sustainably faster vs industry through the expansion of its addressable market and market share gains.
  • We believe this augurs well for UMS given its primary role in the manufacture of components for various semiconductor equipment and that it handles c.70% of manufacturing and assembly for Applied Material’s Endura deposition system. Plans to grow production capacity by approximately 30% by end- 2018 also allows UMS to better capitalise on this strong end demand.
  • To capture the growth potential arising from the strong semiconductor uptrend, we impute a higher valuation multiple from 9x to 11x FY18F PE (or 9x ex-cash). This still represents a discount to larger peers’ 14x. 
  • Maintain BUY with higher TP of S$1.33.


Attractive 6.2% yield on offer. 

  • Backed by current net cash of S$47.8m, proven cash flow-generation capabilities and positive earnings outlook, we believe a higher dividend payout of 6.5 Scts (vs 6 Scts p.a. in FY14-16) for FY17F is probable. 
  • As a steady dividend play, the stock's attractiveness can be further enhanced by the prospect of even higher dividends.


Takeover potential. 

  • The group only has one large shareholder with a 20% stake. With the extension of the Endura contract providing good earnings visibility, strong cash flow and net cash, UMS is an attractive takeover target.


Valuation

  • Maintain BUY with higher TP of S$1.33, which is based on 11x (or 9x ex-cash pe) FY18F PE, at a discount to larger peers 14x.
  • A prospective 6.2% yield is also on offer.


Key Risks to Our View

  • Key client risk. Historically, c.90% of UMS’ revenues on average can be attributed to Applied Materials. Disruptions to its entrenched relationship or weakness in Applied Materials’ end demand could significantly weigh on UMS’ outlook.




Singapore Research Team DBS Vickers | Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2017-05-23
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.33 Up 1.070



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