UMS Holdings - SAC Capital 2022-05-26: Navigating Well In A Challenging Environment


UMS Holdings - Navigating Well In A Challenging Environment

  • UMS’s 1Q results exceeded our expectations as revenue and net profit formed 28%/34% of our estimates. Revenue rose 71% y-o-y to S$84.7m and net profit increased 26% y-o-y from higher semiconductor sales, consolidation of JEP (SGX:5FA)’s results, and larger contributions from other subsidiaries (Starke and Kalf). JEP’s earnings were consolidated from 2Q21.
  • The smaller growth in net profit was due to a higher effective tax rate of 18.6%, as UMS assumed higher tax payout if their appeal is not granted.

Gross margin stabilised at ~51% and can be maintained despite an inflationary environment.

  • UMS (SGX:558) can generally pass on to consumers the hike in prices of commodities used to produce component parts. As UMS sources from a list of vendors approved by AMAT, any cost increase can also be passed through.
  • Despite shortages in certain parts, UMS contractually is allowed to ship the incomplete sets of integrated system. The missing parts will be delivered directly to AMAT once made available. To work around supply chain bottlenecks, AMAT is merging system modules onsite at foundries. As such, delivery of systems from UMS’s end is unlikely to stall.
  • UMS’s contract with AMAT is due this year. Management is optimistic that the contract will be renewed. Given that the main challenge AMAT faces is securing parts, we believe current supply chain dynamic works in UMS’s favour.
  • Production output continues to be capped by UMS’s labour resources. Tight labour market has seen companies in the industry paying wages exceeding the recent minimum wage of RM1500. UMS is expected to incur higher labor costs to attract skilled workers. The impact of labor constraint is mitigated as UMS capitalise more on JEP’s production capacity.

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  • We revise UMS's FY22E revenue forecast upward by 24% to take into account robust sales and higher contribution from its subsidiary, Kalf, with 2 more projects expected to be completed by FY22. Net profit estimate increased 23% accordingly.
  • There are upside risks if UMS is successful in its pioneer tax appeal to Malaysian authorities and onboarding of new customers which would significantly reduce reliance on AMAT.
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  • We raised our DCF-derived target price for UMS by 12% to S$1.55 (COE: 12.1%).

Lim Shu Rong SAC Capital Research | https://www.saccapital.com.sg/ 2022-05-26
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