UMS - CGS-CIMB Research 2020-11-13: Diversification Efforts Intensify


UMS - Diversification Efforts Intensify

  • UMS’s 3Q20 net profit beat expectations at 29% of our/consensus full-year forecast. 9M20 net profit was above at 79% of our FY20F.
  • The outperformance was due to higher revenue in the semicon segment (+39% y-o-y in 3Q20) and wider gross material margin (cost efficiencies).
  • With a strong FY21F outlook, we lift our FY20-22F EPS forecasts and upgrade UMS from Hold to ADD.

UMS's 3Q20 results were better-than-expected

  • UMS Holdings (SGX:558)'s revenue rose 37% y-o-y to S$45.2m in 3Q20, forming 31%/29% of our and Bloomberg consensus FY20F forecast which was above expectations. Similarly, net profit beat our/consensus expectations at 29% of FY20F forecast.
  • Despite higher revenue contribution from lower margin system integration sales (55% of 3Q20 semiconductor segment sales), UMS’s gross material margin was still respectable at 55.3% in 3Q20 (3Q19:54.9%). The improvement in the gross material margin was due to productivity gains and cost reductions.
  • Share of earnings of associate, JEP Holdings Ltd (JEP SP, Unrated) fell 43% y-o-y to S$0.4m. This was also better-than-expected as government grants and better performance in its precision engineering business at JEP offset the revenue decline in its aviation business.

Dividend cut suggests possible short-term business opportunity

  • After reverting to a DPS of 1.0 cents since 1Q20, UMS has cut dividend again to 0.5 cents, citing a desire for greater financial flexibility to take advantage of new growth opportunities in the short-term. Given its high single customer concentration risk (more than 90% of 9M20 revenue), UMS has been diligently on the lookout for opportunities to diversify its business.
  • Although no details were released, we think that the need to cut dividend suggests that any opportunity that materialises could require more significant capex on UMS part. To be prudent, we cut our UMS's FY20-22F dividend forecast from 6 cents previously to 4 cents. If the diversification does not take place, we think dividend will revert back to 6 cents.

Upgrade UMS to ADD on strong FY21F outlook

  • We raise our UMS's FY20-22F EPS forecast by 5.6-8.3% as we believe UMS will benefit from the bright outlook for its key customer, Applied Materials.
  • We believe that the outlook for UMS in FY21F remains positive. We note that Semiconductor Equipment and Materials International (SEMI) expects global fab equipment spending to grow 13% y-o-y in 2021. Our Target Price is based on 2.50x FY20F Gordon Growth P/BV (previously 2.30x). We upgrade UMS from Hold to ADD on higher earnings expectations.
  • See UMS Holdings Share Price; UMS Holdings Target Price; UMS Holdings Analyst Reports; UMS Holdings Dividend History; UMS Holdings Announcements; UMS Holdings Latest News.
  • Key re-rating catalyst is stronger-than-expected recovery for the semicon industry.
  • Key downside risk is disruption to the supply chain if the COVID-19 outbreak worsens in the coming winter.

William TNG CFA CGS-CIMB Research | 2020-11-13
SGX Stock Analyst Report ADD UPGRADE HOLD 1.27 UP 1.100