UMS Holdings - UOB Kay Hian 2022-02-09: 2021 To Mark Record Year


UMS Holdings - 2021 To Mark Record Year

  • UMS (SGX:558)’s upcoming 4Q21 results should reflect a production normalisation following the COVID-19-related disruption at the Penang factory in 2Q and 3Q. Our revised 4Q21 estimated net profit of S$16.6m looks achievable, supported by healthy orders and deliveries at key client Applied Materials.
  • The demand-supply imbalance from new technology innovations portends a bright outlook for 2022-23, implying attractive valuations. Maintain BUY with a slightly higher target price for UMS.

Expect UMS to close 2021 at a record.

  • We are anticipating a record year in 2021 for UMS (SGX:558) since its founding in 2005.
  • Following a COVID-19-disrupted 2Q and 3Q, normalised Penang factory operations in 4Q21 has led us to an upward revision of our revenue and net profit estimates of S$55.9m and S$14.5m to S$64.0m (+45.1% y-o-y) and S$16.6m (+54.1% y-o-y) respectively. This implies 2021 revenue and net profit of S$248.0m (+50.8% y-o-y) and S$64.0m (+47.1% y-o-y). If achieved, this will mark the first in corporate history for revenue to hit above the S$200m mark (2010-20 average of S$124m, ranging between S$110m and S$164m), and the highest profit it has ever achieved (2017: S$52.0m).
  • The positive operating leverage also translates to solid free cash flow for UMS, which could bring about an upside surprise in dividends. We deem current valuation of 10.5x/9.5x 2022/23F P/E to be attractive, supported by a 4.9% yield.

Positive for UMS as TSMC continues to ramp up capex in 2022.

  • In mid-Jan 22, Taiwan Semiconductor Manufacturing Company (TSMC), the largest contract UMS holds the lion’s share among three subcontractors globally that manufactures the wafer transfer module in the platform.

Upstream manufacturers facing supply chain delays highlight demand-supply imbalance.

  • On 26 January, wafer fabrication equipment manufacturer Lam Research (LRCX US) reported a miss on sales estimates for its 2QFYJun 22 results due to supply chain-related delays. Our view is that it strongly reflects the tight capacity situation at manufacturing subcontractors including UMS, which are already witnessing elevated utilisation levels.

Semiconductor secular growth is here to stay.

  • Demand for semiconductor chips is growing due to the increasing automobile electronic content, new generation of 5G smartphones and infrastructure, the proliferation of IoT, as well as the increased need for data centres and accelerated personal computer growth due to pandemic-driven home-based work, education, and entertainment.
  • Supply, on the other hand, has been slow to match demand as subcontractors have adopted a wait-and-see approach since the start of the pandemic for signals on demand to wane.

New capacity coming on stream in 3Q22 may prove timely.

  • Our view is for factory we expect full production to come on-stream from 2023 onwards.

Solid FCF generation.

  • Along with the strong operating leverage that will catapult earnings trajectory, free cash flow (FCF) generation is expected to remain strong. Our estimates suggest a rising FCF of S$45.6m and S$60.2m for 2021 and 2022 respectively, and S$84.1m in 2023. This will improve net cash per UMS share from S$0.064 in 2020 to an estimated S$0.091 in 2021, S$0.127 in 2022 and 19.3 cents in 2023.

UMS - Earnings revision & Recommendation

Clement Ho UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-02-09
SGX Stock Analyst Report BUY MAINTAIN BUY 1.80 UP 1.660