UMS Holdings Ltd - CIMB Research 2017-07-04: Hitching A Ride On The Semiconductor Upswing

UMS Holdings Ltd - CIMB Research 2017-07-04: Hitching A Ride On The Semiconductor Upswing UMS HOLDINGS LIMITED 558.SI

UMS Holdings Ltd - Hitching A Ride On The Semiconductor Upswing

  • UMS has re-rated (+64% YTD) on the back of AMAT contract renewal and semiconductor upturn. We believe there is still upside with catalysts ahead.
  • Higher sales, driven by orders from AMAT, could lead to EPS growth exceeding our expectations of 78% in FY17F and 10% in FY18F.
  • Positive on continual diversification efforts, like the recent 51% Kalf acquisition.
  • Potential for higher dividends given its profitability, superior cash-generating ability and strong net cash position (S$47.8m as at end-1Q17).
  • Still an Add with S$1.15 target price (at 2.41x FY17F P/BV) and 5.9% dividend yield.

AMAT contract renewal comes with higher volume 

  • An integrated OEM for front-end semiconductor equipment manufacturing that offers both component manufacturing and sub-assembly, UMS has proven itself to be a reliable partner to anchor customer Applied Materials (AMAT) when it successfully renewed its contract with AMAT in late 2016 for another three years. 
  • We expect the company to go from strength to strength with AMAT, given this entrenched relationship, its established track record of over 20 years and its engineering capabilities.

Share price driver #1: the beginning of 2-year upturn 

  • UMS’s 1Q17 core EPS expanded 146.4% yoy, led by sales growth in both semiconductor integrated system (+192%) and component (+47%) segments, possibly a sign of robust semiconductor capital expenditure ahead. 
  • Semiconductor Equipment and Materials International (SEMI) forecasts global fab equipment spending to reach an industry all-time high of US$46bn in 2017 and US$50bn in 2018. The stock could re-rate on an earnings beat to our projected 10-78% EPS growth over FY17-18.

Share price driver #2: higher dividends 

  • UMS’s consistent payout of 5-6Scts DPS since FY10 is a testament to its cash generative business, translating into historical yields of 6%. 
  • Based on our forecasted free cash flow of S$30.9m for FY17 and its net cash position of S$47.8m as at end-1Q17, we think there is room for UMS to pay higher dividends (FY16: 6Scts), lending further share price support.

Share price driver #3: stronger diversification from Kalf 

  • We like UMS’s continual efforts to diversify its earnings. While a 10% stake acquisition in ASF (a Malaysian metallic aerospace component supplier) is likely to take time to gain better traction in this synergistic aerospace component business, its recent 51% stake in Kalf Engineering (a water and chemical engineering solutions specialist) could be more meaningful given Kalf's order book of c.S$13m from seven projects. 
  • We have yet to factor in any contribution from Kalf, which will be consolidated in UMS’s 2Q17 results.

Potential cost savings from expansion to Penang 

  • A longer-term share price catalyst could be the capacity expansion to Penang (estimated capex of RM80m) in a few years’ time, as we expect UMS to benefit from 
    1. a larger talent pool, 
    2. more favourable tax status, and 
    3. lower operating costs. 
  • These will help meet the higher volume demand from AMAT and mitigate cost-down pressure, in our view.

Reiterate Add with S$1.15 Target Price 

  • Maintain Add with unchanged forecasts and target price of S$1.15 (still based on 2.41x FY17F P/BV). 
  • Downside risks to our Add rating are 80-90% customer concentration and cyclicality of the semiconductor industry.

William TNG CFA CIMB Research | 2017-07-04
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.150 Same 1.150