UMS Holdings - DBS Research 2020-02-26: Positive Outlook Intact


UMS Holdings - Positive Outlook Intact

  • Remain positive on semiconductor; maintain BUY with slightly lower Target Price of S$1.12 on lower margin assumptions.
  • Semiconductor equipment sales is expected to grow by 5.5% in 2020, on advance logic and foundry spending, according to SEMI. There are also signs that inventories are stabilising while DRAM pricing is likely to rise. Chip sales have bottomed out and are forecast to improve, though the recovery could be more gradual, on the back of the ongoing trade war and disruption to supply chain as a result of COVID-19.

UMS, a pure semiconductor play, is a prime beneficiary of this uptrend.

  • We expect further re-rating of the UMS Holdings (SGX:558)’s forward PE to +2SD on FY20F earnings. During the last semiconductor upcycle in 2016/2017, the PE valuations shot beyond the +2SD level. The semiconductor market is now larger and less volatile than before, due to growth and diversification of demand drivers, spanning consumer and enterprise end-markets. Thus, we believe +2SD is a fair valuation peg. Maintain BUY.

FY19 results in line; weaker margins on change in product mix.

  • UMS' group revenue for FY19 edged up 3% to reach S$131.9m, buoyed by a stronger performance in the second half of the year, on the back of the recovery in the semiconductor sector. The 22% dip in net profit to S$33.2m was the result of a softer gross margin of 52.9% compared to 60.2% in FY18. This reflected the change in product mix, with a higher share of Semiconductor System Integrated sales which yield lower margins, as compared to component sales.
  • Contribution from the non-semiconductor segment, though still small, account for < 10% of total revenue, more than doubled in FY19, mainly attributable to its investment in Starke Singapore and Kalf Engineering.
  • Geographically, FY19 revenue from Singapore grew 20% compared to FY18 due to higher demand for Semiconductor Integrated Systems. US, Taiwan and Malaysia registered lower sales.
  • For 4Q19, UMS' net profit came in at S$9.2m (-4% y-o-y; +1% q-o-q) while revenue surged 55% y-o-y (+23% q-o-q) to S$40.4m.

Higher DPS vs FY18.

  • A 2-Sct final and 0.5-Sct special DPS was declared, bringing FY19 DPS to 4 Scts, vs 4.5 Scts in FY18, but higher than our expectation of 3.5 Scts.

Strong cash position.

  • For FY19, UMS generated S$53.6m in positive net cash flow from operating activities vs S$38.7m in FY18; while free cashflow more than doubled to S$53.4m. The group’s net cash had risen to S$25m by end-4Q19, reversing from a net debt of S$1.4m as at end-4Q18.

Positive outlook intact.

  • We remain positive on the semiconductor sector. According to SEMI, equipment sales are expected to grow by 5.5% to S$60.8bn in 2020. This is on the back of advance logic and foundry spending and new projects in China.
  • UMS remains a beneficiary of the sustained capital equipment spending and the global memory rebound. There are also signs that inventories are stabilising while DRAM pricing is likely to rise. Chip sales have bottomed out and are forecast to improve, though the recovery could be more gradual.
  • The overall business sentiment could still be weighed down by the continuing US-China trade disputes and the challenges posed to global supply chains due to the ongoing global coronavirus contagion.

Impact from COVID-19.

  • UMS’s manufacturing facilities are mainly in Penang, Malaysia, and thus there is no direct impact on its production. However, the supply chain for its key product, Eudura deposition system, is disrupted as a lack of manpower and logistical hurdles prevent the component suppliers from full resumption of production in China due to COVID-19. Assuming the situation does not worsen from now, production is expected to catch up by 1QFY20.
  • Overall, we are still positive on the recovery of the semiconductor industry, driven by new technologies and 5G.

Tweak FY20F/FY21F earnings by -3%/-4%

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2020-02-26
SGX Stock Analyst Report BUY MAINTAIN BUY 1.12 DOWN 1.160