UMS Holdings Ltd - CIMB Research 2017-10-24: 2017-18F ~ Record-breaking Years For Fab Equipment

UMS Holdings Ltd - CIMB Research 2017-10-24: 2017-18F ~ Record-breaking Years For Fab Equipment UMS HOLDINGS LIMITED 558.SI

UMS Holdings Ltd - 2017-18F ~ Record-breaking Years For Fab Equipment

  • We reviewed the 3Q17F earnings guidance of UMS’s major customer Applied Materials (AMAT) & SEMI’s latest global semiconductor equipment spending forecast.
  • We note that industry conditions remain bullish, and AMAT is bullish on the sales outlook for its semiconductor business until 2020F.
  • We opine that UMS’s sales moderation in 2H17F will be less steep than what we feared earlier and earnings momentum could still be strong in 2H17F and FY18F.
  • In this update note, we roll over our valuation basis to FY18F, raise our earnings forecasts leading to higher implied P/BV multiple, and adjust for a 1-for-4 bonus issue.

Unprecedented industry spending 

  • In its 12 Sep 2017 update, SEMI ( commented that 2017F global fab equipment spending (new and refurbished) is expected to increase 37% yoy, reaching a new annual spending record of about US$55bn. 
  • SEMI also forecasted that in 2018F, worldwide fab equipment spending will increase even more, by another 5% yoy, to reach a new record-high of about US$58bn. 
  • In its Jul 2017 update, SEMI forecasts global fab equipment spending to hit US$49.4bn in 2017F and US$53.2bn in 2018F.

Major customer AMAT on a roll 

  • In its 3Q17 earnings release, Applied Materials Inc (AMAT US, Not Rated) guided that its Semiconductor Systems (SS) revenue (relevant to UMS) is expected to grow 14% yoy in 4Q17F. AMAT expects its SS revenue to grow both on qoq and yoy bases in 1Q18F. Separately, in its Analyst Day presentation on 27 Sep, AMAT projected that its SS revenue could rise from US$9.1bn in FY17F to US$11.6bn in FY20F. 
  • Given that AMAT is a major customer for UMS, we think this would be positive for UMS.

Lowering operating costs further 

  • UMS enjoys pioneer tax incentive, lower labour costs and electricity tariffs at its Penang facility than in Singapore. As such, it has moved the majority of its Singapore precision machining operations to Penang over the years and this was completed in FY16. 
  • With the recent renewal of its Integrated System Business (ISB) contract with AMAT for another three years, UMS will also be moving this ISB work to Penang. The group plans to spend RM80m over the next few years to build cleanrooms to support this business.

New Independent Director = new opportunities 

  • We believe UMS’s new Non-Executive Independent Director Datuk Phang Ah Tong could bring new business opportunities for UMS. Datuk Phang is an economist and he recently retired from the Malaysian Investment Development Authority (MIDA), where he held the post of Deputy Chief Executive Officer. He was with MIDA for 36 years and assisted in developing the manufacturing, non-manufacturing and services sectors in Malaysia. His role included the promotion of global foreign direct investment in Malaysia.

Valuation & Recommendation 

  • We previously assumed that 2H17F revenue would be weaker than in 1H17, given that UMS guided for moderation in demand from AMAT. However, given the strong semiconductor industry conditions, the moderation may not be as severe as we feared. 
  • We have revised our revenue forecasts to be less conservative for FY17F and we now assume 5% revenue growth for FY18F, in line with SEMI’s industry revenue growth forecast. Given the limited visibility for FY19F, we choose to be conservative and assume a slight yoy sales decline.
  • We also adjust for a 1-for-4 bonus issue and the rollover of our valuation basis to FY18F. Given higher ROEs, our Gordon Growth P/BV multiple rises to 2.80x (cost of equity 7.8%, zero growth) versus 2.39x previously. 
  • Our Target Price of S$1.13 implies FY19F P/E of 13.3x, at a 6% discount to AMAT’s multiple. 
  • A potential rerating catalyst is a spike in customer’s orders. 
  • Peaking of the semiconductor cycle in 2017F is a key downside risk.

William TNG CFA CIMB Research | 2017-10-24
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