UMS Holdings - DBS Research 2020-04-01: Growing At Slower Pace

UMS HOLDINGS LIMITED (SGX:558)

UMS Holdings - Growing At Slower Pace

Semiconductor more resilient, as it forms part of the essential goods supply chain.
Expect weaker semiconductor billing data ahead despite strong February number, but still post positive y-o-y growth.
Maintain BUY with lower Target Price of S$0.77; UMS remains a beneficiary of capital equipment spending.

The COVID-19 pandemic has hit the business world at an unprecedented scale and speed. It has caused the closures of businesses, the stoppage of factory outputs, and the disruption to global manufacturing industries and their supply networks. The issue is compounded with the lockdown orders and the restriction in movements, leading to a demand crisis.

UMS Holdings (SGX:558)'s key customer Applied Materials (AMAT) has recently withdrawn its business outlook for 2Q FY October 2020 because the COVID-19 pandemic is affecting its supply chain and manufacturing operations. AMAT had previously provided a bullish guidance for 2Q FY20, expecting revenue to surge by c.23% y-o-y and earnings to jump 50% y-o-y, during the release of its 1Q FY20 results in February.
With c.90% of its revenue attributed to AMAT, we have trimmed our earnings forecasts for FY20F and FY21F by 11% each. Accordingly, Target Price is reduced to S$0.77, pegged to +0.5SD valuation (vs +2SD previously) or 11.6x on FY20F earnings.
For FY20F, we now expect single-digit growth for revenue and earnings of 8% and 6% respectively, vs 15% and 19% previously, as we have also lower gross margin to 51% from 52.5% due to shortages of some components.

Its Penang factory will remain closed until 14 April 2020, in compliance with the Malaysian Government's announcement on 25 March 2020 to extend its movement control order (MCO) nationwide to address the COVID-19 outbreak.
The Group's factory in California, US will stay closed in compliance with the California State's "Stay at Home" Executive Order in the US issued on 19 March 2020, until further notice.
Production facilities in Singapore will remain in operation.

We have revised down our FY20F and FY21F earnings forecasts by 11% each, on supply disruption and weaker demand. Target Price is lowered to S$0.77, pegged to +0.5SD valuation (vs +2SD previously) or 11.6x FY20F earnings.
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UMS remains a beneficiary of capital equipment spending, driven by new technologies and 5G, though growth momentum is much muted now.