UMS Holdings - DBS Research 2021-03-01: Riding On Strong Chip Demand


UMS Holdings - Riding On Strong Chip Demand

  • UMS reported strong FY20 results despite impairment losses.
  • Core earnings in line; lower dividend for FY20.
  • Positive industry outlook; UMS in a sweet spot to ride on this rising trend.
  • Maintain BUY; target price raised to S$1.57, pegged to peak valuation of 17x FY21F PE.

Strong FY20 results despite impairment losses

  • UMS (SGX:558) reported a 24.7% y-o-y rise in FY20 revenue to S$164.4m. Semiconductor Integrated System sales jumped 32% y-o-y to S$77.6m in FY20 and Component sales increased 22% y-o-y to S$75.5m.
  • Net profit of S$36.5m, +8.7% y-o-y, however, was hit by significant impairment losses, including a one-off S$7m impairment of goodwill in its subsidiary Kalf Engineering and investment in associate company JEP Holdings (SGX:1J4) as well as a S$2.1m share of loss in JEP. The loss in JEP was mainly attributed to a goodwill impairment of S$6.25m and the Group’s share of the impairment loss was S$2.5m.
  • Overall, despite the significant impairment costs, UMS still performed better than FY19.

Core earnings in line.

  • Excluding these items, UMS would have achieved net profit of S$46.0m, a 37% surge from FY19, in line with our forecasts.

Lower dividend for FY20.

  • Final dividend of S$0.01 was declared, vs S$0.025 declared last year, bringing UMS's total dividend for FY20 to S$0.035, vs S$0.04 in FY19. See UMS Dividend History.
  • As a prudent measure amid global economic challenges, dividend payout is moderated to 51% as compared to 64% in FY19. UMS prefers to conserve cash to maintain a strong balance sheet in order to drive future business growth.

UMS did well in all regions.

  • Geographically, UMS’s key markets remained robust. Malaysia surged 48% driven by higher material distribution sales, while Taiwan saw a 34% leap due to increased component spares sales. Singapore also rose 9% attributed by higher shipments of semiconductor Integrated System sales, while US remained stable.

Improvement in margins.

  • In addition to the spike in demand, UMS's overall gross material margins increased to 53.5% from 51.1% due to a shift in product mix with higher concentration in Component sales, which command higher margins compared to System Integrated sales.

Positive industry outlook; UMS in a sweet spot to ride on this rising trend.

  • 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 30% y-o-y in January 2021 to US$3.04bn. January also marked the 16th consecutive y-o-y increase.
  • The World Semiconductor Trade Statistics (WSTS) and SEMI are projecting a stronger semiconductor industry in 2021. WSTS expects chip sales to accelerate, growing 8.4%, to hit US$469 bn in 2021. There have also been shortages due to the pandemic-fuelled demand. Global chip demand for automotive electronics has been gaining momentum since 4QFY2020 and will continue to serve as a key growth driver as demand exceeds supply.
  • Similarly, SEMI forecasts growth of global sales of semiconductor manufacturing equipment will carry on till 2022, hitting US$76.1bn. The adoption of technologies such as artificial intelligence (AI), IoT in fabrication and the constant use of advance chipsets in automotive and consumer electronics, will drive the demand for semiconductor manufacturing. This demand is expected to boost support for the semiconductor manufacturing equipment market.

Tweaked earnings slightly higher.

  • We have raised our revenue forecast of UMS on the back of the strong demand for chips which has even led to chips shortages for some industries e.g. the automotive sector. However, the positive impact is partially offset by the higher tax assumption due to the expiry of the pioneer tax status in Malaysia.
  • Overall, our FY21F/FY22F earnings forecast for UMS is adjusted by +1%/+4%.

Maintain BUY on UMS; target price raised to S$1.57, pegged to peak valuation.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2021-03-01
SGX Stock Analyst Report BUY MAINTAIN BUY 1.570 UP 1.360