In his report dated Aug 15, Seet notes that UMS reported a weak 1HFY2023 ended June, with a patmi of $29 million that came in below estimates. He expects the company’s 2HFY2023 to remain “equally weak”, as orders are not expected to ramp up from key customers in 2023.

Seet believes UMS’ 2HFY2023 is likely to be similar to its first half performance, during which revenue dropped by 9% y-o-y to $155.1 million and patmi declined 27% y-o-y to $29 million. This came as a result of weaker gross margins which edged down to 46.3% from 51.7% in 2QFY2022, mainly due to the weaker US Dollar and lower machine utilisation rates.

More positively for shareholders, UMS announced dividends for 2QFY2023 that increased by 20% to 1.2 cents per share from 1.0 cent in the previous quarter.

Seet explains that UMS now has greater certainty on its longer-term prospects after renewing an Integrated System contract with an existing key customer to end-2025. UMS also received an in-principle agreement with a new customer for a three-year contract with a renewal option, and expects a $30 million contribution from the new customer in 2024 before it becomes a $300 million per annum top-line contributor in the next three to five years, he adds.

“We remain optimistic that its longer-term prospects are unchanged, especially as it has gained a new large customer, which should provide growth in the next few years,” says the analyst, who has lowered his FY2023 patmi forecast by 10.2% while increasing his FY2024 forecast by 17.2%.

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='/capital/brokers-calls/s-reits-not-yet-vogue-dbs-continues-favour-industrial-and-retail-subsectors?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>S-REITs not yet in vogue, DBS continues to favour industrial and retail subsectors</a>

“However, we believe the share price has fully priced in any near-term upside unless orders ramp up in FY2024,” adds Seet. “We prefer Frencken as better quarters lie ahead for it, in our view.”

His higher target price of $1.16 for UMS is based on a 9x FY2024 price-to-earnings ratio (P/E).

Upside risks to his valuation include stronger revenue momentum following capacity expansion in FY2022, improved contributions from subsidiaries Kalf Engineering, Starke and JEP, and better cost controls.

See also: <a class='gtm_see_also_2_inread' style='text-decoration: underline;' href='/capital/brokers-calls/uob-kay-hian-lifts-comfortdelgros-tp-161-upon-seeing-improving-rail-and-taxi?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>UOB Kay Hian lifts ComfortDelGro’s TP to $1.61 upon seeing improving rail and taxi ridership</a>

On the other hand, UMS’ margins would be impacted if the company were to face higher labour costs or difficulty expanding its workforce to cope with strong order momentum, as well as negative operating leverage from falling volumes. Considering UMS has a quarterly dividend policy and a track record of strong cash flow generation, Seet adds that lower-than-expected dividends could “spook” yield investors.

As at 1.20pm, shares in UMS were trading flat at $1.12.

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