UMS Holdings - DBS Research 2020-08-14: Riding On The Coattails Of Semiconductor Upcycle

UMS HOLDINGS LIMITED (SGX:558)

UMS Holdings - Riding On The Coattails Of Semiconductor Upcycle

UMS' 2Q20 results slightly above expectations; higher DPS declared.
Supply chain recovering; strong improvement in customer demand.
Rosy outlook for semiconductor; SEMI expects equipment sales to increase 6%/17% in 2020/2021.

Strong revenue boosted by semiconductor segment. UMS Holdings (SGX:558)'s 2Q20 revenue climbed 35% y-o-y to S$40.3m. This was attributed to the robust growth of its semiconductor business, which contributed 92% to total revenue. Integrated System sales rose by 65% y-o-y to $19.6m while revenue from component sales were also up by 22%. Others segment dipped 13% mainly due to lower sales from its subsidiary Kalf Engineering.
Gross margins dipped slightly to 50.8% in 2Q20 compared to 53.1% in 2Q19, mainly due to changes in the product mix. The higher margins component segment accounts for a lower 47% of the revenue for the semiconductor segment, vs 53% for the integrated system division.
2Q20 net profit surged 43% y-o-y. 2Q20 net profit jumped 43% y-o-y, on the back of the higher revenue, and higher contribution from its associate, JEP Holdings (SGX:1J4).
1H20 net profit of S$22.3m accounts for 52% of our FY20F forecasts, slightly above expectations.
UMS declared higher DPS. A 1ct DPS was declared, vs 0.5cts last year.

UMS continued to generate a healthy free cash flow of S$10.4m in 2Q20. Net cash grew 65% to S$41.3m from end December 2019. With its strong financial position, the Group further invested S$1m in JEP Holdings, pared down its borrowings and acquired S$1.9m of UMS shares under its share buy-back scheme.

SEMI is expecting sales of semiconductor equipment manufacturing to increase by 6% y-o-y in 2020 and 17.4% in 2021. According to SEMI’s mid-year forecast, global sales of semiconductor equipment manufacturing is projected to increase 6% y-o-y to US$63.2bn in 2020. SEMI added that sales will rise to US$70bn in 2021 locking in double-digit growth of 17.4%. The growth will be driven by memory spending and investment in leading-edge technologies and China.
Foundry and logic spending growth will account for about 50% of total wafer fabrication equipment spending in 2020 and 2021. Asia will be the key powerhouse for semiconductor expansion and is forecast to lead the pack in capital spending in 2020.
Furthermore, both DRAM and NAND spending in 2020 will surpass 2019 levels and expected to grow by over 20% respectively in 2021. These strong growth figures augur well for UMS, which is a beneficiary of the vibrant chip equipment manufacturing market.
Momentum for semiconductor equipment billings remained strong, up 14% y-o-y in June 2020, its ninth consecutive month of y-o-y increase.

Slight uplift in earnings, maintain BUY with higher Target Price of S$1.37. We have lifted FY20F/FY21F earnings by 7%/6% on the back of the strong demand and recovery in the supply chain.
Our Target Price is raised to S$1.37 (prev S$1.04) pegged to +2SD of its mean (vs +1SD previously) or 15x PE on FY21F earnings, rolled forward from FY20F. Global players in the semiconductor equipment space are trading at average PE of 26x FY20F and 19x FY21F.
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UMS' dividend yield of 5% is attractive based on 6cts DPS forecast.
Maintain BUY.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2020-08-14

SGX Stock Analyst Report BUY MAINTAIN BUY 1.37 UP 1.040