UMS HOLDINGS LIMITED (SGX:558)
UMS Holdings - Growth Trajectory To Continue In 2021
Accelerated demand drove UMS's FY2020 topline
- UMS (SGX:558)'s FY2020 revenue increased 24.7% y-o-y from S$131.9 million to S$164.4 million, underpinned by strong demand in the semiconductor segment, which surged 26.8% while the Others segment increased 1.8%.
- UMS's net profit rose by 9.3% from S$33.6 million to S$36.5 million in FY2020. Gross margin improved slightly to 53.3% in FY2020, from 52.9% in FY2019. Net profit margin, however, fell 3.2 ppt from 25.4% to 22.2% due to the impairment charge.
- UMS took a S$1.1 million impairment of goodwill in 51%-owned Kalf and S$5.9 million impairment charge for its investment in 40.7% associate JEP (SGX:1J4). JEP produces precision machining parts for OEMs that operate in the aviation sector, which accounts for 58.4% of its revenue. It also manufactures equipment and engages in trading. Hit hard by COVID-19, JEP’s revenue fell 17.6% to S$73.3 million. It took a S$6.3 million impairment loss on intangibles that decimated net profit to S$0.2 million, without which net profit would be flat at about S$6.5m.
- Excluding the above, UMS’s net profit would be S$43.0 million, 30.0% higher y-o-y.
- We expect continued growth of the semiconductor segment, driven by strong systems and component sales stemming from higher chip demand.
Semiconductor demand growth to sustain in 2021
- COVID-19 has accelerated the demand for the semiconductor industry, with higher demand from gaming, communications, IT infrastructures, data centers and healthcare electronics. The strong forecasted demand puts UMS in a good position to capitalise on the growth opportunities arising from the chip equipment manufacturing market and the acceleration of digital innovations.
- The World Semiconductor Trade Statistics (“WSTS”) forecasted that chip sales will accelerate, growing to 8.4% to hit US$461 billion in 2021. This is in line with SEMI’s forecasts that semiconductor manufacturing equipment growth will continue, to reach US$71.9 billion in 2021 and US$76.1 billion in 2022, or a growth of 3% and 4% y-o-y respectively.
- According to Global Market Insights, the adoption of technologies such as artificial intelligence (AI), Internet of Things in fabrication and the constant use of advance chipsets in automotive and consumer electronics, will drive the demand for semiconductor manufacturing. This demand will boost support for the semiconductor manufacturing equipment market and is projected to reach over US$80 billion by 2026.
- According to McKinsey, growth in semiconductor sales is expected to be accelerated by a shift towards Artificial Intelligence, 5G Technology, semiconductors that enable servers, connectivity, and cloud usage as online collaboration grows. Other sectors that will fuel demand growth are contactless solutions, automated-delivery solutions, digital work processes and the Internet of Things, especially in traditional sectors, such as healthcare, government, and defense.
Foothold in the global supply chain
- UMS retains its position as a supplier to Applied Materials, a market leader in semiconductor equipment manufacturing with a market share of approximately 15%. UMS also focuses on producing equipment for wafer manufacturing in the upstream integrated circuit manufacturing process.
- Silicon wafers are the basic building blocks of ICs. The sector is resilient in the face of advancement and changes in IC design or manufacturing processes which are further downstream. In light of the recent global chip shortage, Applied Materials is expected to benefit with higher manufacturing equipment sales.
- In Q1FY21 ending January 2021, Applied Materials’ revenue grew to US$5.2 billion, marking a 24.0% y-o-y increase. According to Bloomberg consensus estimates, Applied Materials’ FY2021E expected revenue growth is 26.1%, and net profit 44.6%. Sales is expected to rise through the fiscal year 2021, benefitting from solid demand for foundry and logic-chip, with ongoing shift to next-generation technologies such as 5- and 3- nanometer chips for 5G and data centres. Digital transformation of companies and the accelerating economy are multi-year growth drivers for the semiconductor industry.
Maintain BUY rating at a higher target price of S$1.38
- We maintain a BUY rating on UMS and increase fair value to S$1.38 (from S$1.26) using P/E valuation. Our target price is based on a FY21E P/E of 16.9x, in line with the Singapore sector average P/E of 16.9x.
- We expect the semiconductor growth to continue in 2021, with the adoption of technologies leading to increased demand for advanced chipsets in automotive and consumer electronics. However, we lower our earnings estimates slightly with the possible further impairment loss from JEP with the weakness of the aviation sector.
- See UMS Share Price; UMS Target Price; UMS Analyst Reports; UMS Dividend History; UMS Announcements; UMS Latest News.
- Our target price implies a 25.5% upside to the last UMS share price.
Lim Li Jun Tracy
SAC Capital Research
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Lam Wang Kwan
SAC Capital
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https://www.saccapital.com.sg/
2021-03-10
SGX Stock
Analyst Report
1.38
UP
1.26
