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UMS has 'room for upside' on semiconductor recovery, says Maybank Kim Eng

Stanislaus Jude Chan
Stanislaus Jude Chan • 3 min read
UMS has 'room for upside' on semiconductor recovery, says Maybank Kim Eng
At the centre of the bullish sentiment on UMS is its “entrenched relationship” with its key customer, Applied Materials.
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SINGAPORE (Jan 6): Maybank Kim Eng Research is keeping its “buy” call on precision metals engineering firm UMS Holdings with an unchanged target price of $1.13, on the back of an impending recovery in the semiconductor industry.

According to global industry association Semiconductor Equipment & Materials International (SEMI), global semiconductor manufacturing equipment sales is expected to turn around from an estimated 10.5% drop in 2019 to grow 5.5% to US$60.8 billion ($82.0 billion) in 2020 – before hitting a new high in 2021.

“Further, SEMI sees upside if macro conditions improve and trade tensions ease,” says analyst Lai Gene Lih in a Jan 2 report. “We believe this validates our bullish thesis on UMS.”

Lai forecasts that UMS, which manufactures high precision components and modules found in front-end semiconductor equipment, will see PATMI growth of 31% in FY20E.

The analyst says that this growth will be driven by sustained investments form logic and foundry end-customers, and recovery from memory end-customers.

“SEMI sees upside if the macro economy improves and trade tensions subside in 2020. If this plays out, we see bull case fair value of $1.31 for UMS,” says Lai.

This best case scenario represents a potential upside of more than 28% for UMS, which saw its shares close down 2.9% to $1.02 on Monday.

At the centre of the bullish sentiment on UMS is its “entrenched relationship” with its key customer, Applied Materials (AMAT), which is estimated to have had a 19% share of the global wafer fab equipment (WFE) market in 2018.

“AMAT remains optimistic of its long-term competitive position,” Lai says. “In turn, we expect UMS, having been AMAT’s supplier since 1999, to be a beneficiary of AMAT’s positive long-term prospects.”

At the same time, Lai also points out that UMS will see growth on the back of 39%-owned associate JEP Holdings.

“Through associate JEP, UMS is expanding precision metal engineering to non-semiconductor sectors such as aerospace, which sees tailwinds from outsourcing trends,” Lai says.

In a recent interview with The Edge Singapore, UMS chairman and CEO Andy Luong, who is also the CEO of JEP, had noted the merits of the diversification.

“[JEP] needed financial support, and the acquisition was the best way to help it out and diversify [UMS’] business at the same time,” Luong noted, adding that UMS’ focus on only the semiconductor industry could be “dangerous to some extent”.

In its latest results, UMS saw its share of profits from JEP jump 82% y-o-y to $0.7 million. “The acquisition has definitely put us in a better place than other companies that are solely focused on one [industry],” said Luong.

According to Maybank valuations, share in UMS are trading at an estimated price-to-earnings (P/E) ratio of 12.1 times and a dividend yield of 3.9% for FY20E.

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