UMS Holdings - DBS Research 2020-11-13: Riding On Rising Chip Demand

UMS HOLDINGS LIMITED (SGX:558)

UMS Holdings - Riding On Rising Chip Demand

UMS's 3Q20 results boosted by strong semiconductor integrated system sales.
Dividend maintained in 3Q20; group prefers to conserve cash to drive future growth.
Positive industry outlook; UMS in a sweet spot to ride on this rising trend.

UMS Holdings (SGX:558)'s 3Q20 group revenue rose 37.1% y-o-y (+12% q-o-q) to S$45.2m. The semiconductor segment which accounts for > 90% of total revenue shot up 39% (+13.9% q-o-q), driven by integrated system sales which rose 63% y-o-y to S$23.4m, while component sales went up by 18% to S$19m. Sales outside the semiconductor segment increased 13% mainly due to contribution from Starke Singapore. Group net earnings surged 41.1% y-o-y (+11.9% q-o-q) while gross margin was relatively stable at 55.3% (vs 54.9% in 3Q19).
On a 9-month basis, UMS's revenue surged 32% to S$120.3m while net earnings of S$35.2m jumped 45% y-o-y, exceeding the group’s FY19 earnings of S$33.6m. Revenue and net earnings accounted for 75% and 77% of our forecasts, broadly in line.

A 0.5cts interim dividend was declared, similar to last year. In the last two quarters, dividend declared by UMS was higher y-o-y.
As a prudent measure amid global economic challenges, the group has moderated its dividend payout for 3Q20. UMS prefers to conserve cash to maintain a strong balance sheet in order to drive future business growth.

Geographically, all UMS's key markets (except the US) reported strong revenue growth.
The 52% y-o-y revenue jump in Malaysia was due to higher material distribution by its subsidiary Starke.
Singapore recorded a 47% sales surge which was mainly attributed to increased semiconductor integrated system sales.
Taiwan enjoyed an increase of 40% on the back of higher component spares sales.
US sales softened by 10% in 3QFY2020 due to lower component sales for new systems built.

For 9-month FY20, UMS generated a positive free cash flow of S$30.9m. Its net cash and cash equivalents (net of bank borrowings) improved to S$34.4m as at 30 September 2020 compared to S$25m as at 31 December 2019.

Looking ahead, global chip demand is expected to stay strong. UMS is in a sweet spot to ride on this rising trend. US semiconductor equipment billings passed its previous peak (May 2018) in September 2020 and momentum in the industry remains strong. The US 3-month semiconductor equipment billings increased 40.3% y-o-y in September to US$2.7bn. September also marked the 12th consecutive y-oy increase.
The World Semiconductor Trade Statistics (“WSTS”) and SEMI are projecting a stronger semiconductor industry in 2021. WSTS is expecting the world semiconductor market to expand by 6.2% y-o-y to US$452m, accelerating from a 3.3% y-o-y increase in 2020.
Similarly, SEMI is projecting global fab equipment spending to increase by 13% y-o-y to US$67.7bn in 2021, up from a 8% y-o-y increase in 2020. This will be driven by the pandemic-induced demand for chips from gaming, communications, information technology (IT) infrastructures, data centres and healthcare electronics.

No change in earnings forecast given the broadly in line results. Maintain BUY on UMS with target price of S$1.36 (previously S$1.37) still pegged to +2SD of its 5-year average PE of 14.9x (previously 15x) on FY21F earnings.
See UMS Holdings Share Price; UMS Holdings Target Price; UMS Holdings Analyst Reports; UMS Holdings Dividend History; UMS Holdings Announcements; UMS Holdings Latest News.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2020-11-13

SGX Stock Analyst Report BUY MAINTAIN BUY 1.36 DOWN 1.370