It was perhaps a disappointing 4QFY2020 ending December for precision engineering firm UMS. Headline net profit fell 89% y-o-y in 4Q despite a 9% y-o-y increase for the financial year, with its core PATMI of $10.8 million missing Maybank Kim Eng (Maybank KE) analyst Gene Lih Lai’s estimates despite meeting the lower end of consensus projections. 

But Lih - as well as CGS-CIMB analyst William Tng - remain bullish on the stock, as they maintain their “add” and “buy” calls, in part due to its strong ties with semiconductor equipment manufacturer Applied Materials (AMAT). The company has an entrenched relationship with AMAT, which recently reclaimed its position as the world’s largest vendor of semiconductor manufacturing equipment from rival ASML. 

“Customer Applied Materials (AMAT) estimates 2020 wafer fabrication equipment (WFE) spending was in the high-US$50 billion ($66.5 billion) range, and expects 2021 WFE to be slightly above US$70 billion. Furthermore, AMAT expects to outperform peers in 2021 on the back of robust fundamentals in favour of DRAM investment upswing,” writes the Maybank KE analyst in a March 1 report. 

In addition to WFE, Applied Materials is also involved in emerging technologies such as data centre capex, automotive chip shortages and post-pandemic accelerated digital transformation. Lih therefore sees UMS enjoying a 19% upside potential to his FY2021 growth estimate for the firm despite recent headwinds. 

Lih blames the disappointing 4QFY2020 results for UMS on slower-than-expected revenue momentum and forex losses, which amounted to $1.8 million in 4QFY2020 out of $2.1 million in the financial year. UMS incurred goodwill impairment of $1.1 million and a $5.9 million impairment stemming from its associate, JEP Holdings, of which UMS owns 40.69%. It also bore a $2.5 million share of JEP’s goodwill impairment. DBS Group Research analyst Ling Lee Keng says that net profit without impairment would have come in at $46 million - a 37% y-o-y surge from FY2019. 

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These impairments are seen to be one-off drags on net profit. Lih sees the JEP impairment measures as a prudent move given the present weak aerospace conditions, with these seen to be written back following long-term aerospace recovery. It was for this reason too that UMS declared a lower 4QFY2020 dividend of just 1 cent vis-a-vis the 2 cent final dividend in 4QFY2019 in addition to a special dividend of 0.5 cents.

Nevertheless, UMS continues to be relatively strong in terms of its balance sheet. Tng points out that the firm has net cash holdings of $38 million. 

“Excluding these exceptional items, core net profit was $45.6 million (+36% y-o-y). FY20 core net profit was in line at 95% of our full-year forecast,” remarks Tng in a Feb 26 report. Revenue, notes Lih, also grew 9% y-o-y due to growing semiconductor equipment demand globally. 

Management expects a robust year for semiconductors in FY2021, with global chip sales seen to grow 8.4% y-o-y in 2021 to US$469 billion according to the World Semiconductor Trade Statistics. The Semiconductor Equipment and Materials International forecast sees global sales reaching US$68.9 billion for 2020 before growing 4.4% to US$71.9 billion, followed by 5.8% y-o-y to US$76.9 billion in 2022. 

"UMS Holdings is in a sweet spot to ride on strong global chip demand, on the back of the acceleration of 5G, artificial intelligence (AI) and other technology-driven developments," notes Ling of DBS. He has issued a "buy" call on the stock too at a target price of $1.57, pegged to a peak valuation of 17 times FY2021 P/E due to this strong industry outlook. 

A bullish Tng has therefore gone so far to raise target price to $1.31 from $1.27. Still, he cut FY2021-2022 earnings per share (EPS) predictions by 7.4%-7.5% to account for headwinds facing JEP and potentially higher tax rates due to the expiration of pioneer tax status for a Malaysian subsidiary in FY2021, with a higher-than-expected tax potentially a downside. Tng has also pared back FY2021-2023 dividend assumptions to 3.5 cents per annum. 

“The impairment does not affect our thesis that UMS is a proxy to the ongoing semi equipment upswing. Hence, we see the current sell-off as an opportunity to ‘buy’ the dip,” says Lih of Maybank KE. 

As of 3.36pm, UMS is trading 1.74% down at $1.13. P/E ratio is 13.58 and dividend yield 3.98%.