UOB Kay Hian Research analyst Clement Ho has initiated coverage on UMS Holdings with a ‘buy’ call and TP of $1.65.In a research note dated March 16, Ho views UMS as a pure semiconductor play poised to ride the strong industry uptrend.
Despite supply chain disruptions due to Covid-19, the analyst notes that demand has remained resilient on the back of a growing need for semiconductor chips arising from 5G-related spending and the growth of data.
The positive outlook for UMS is underpinned by its position as a critical supplier to Applied Materials (AMAT), who contributed 93% of the company’s FY2020 ended December 2020 revenues.
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Ho points out that AMAT continues to see strong order demand for its semiconductor segment, which is up 50% y-o-y as of February, the midpoint of its 2QFY2021 ending October 2021, due to acceleration of the economy’s digital transformation.
Ho also anticipates that positive operating leverage from the cyclical upturn will boost UMS’ earnings, with core net profit for FY20201 estimated to jump 36% to $59 million on the back of 25% revenue growth to $205 million.
“The cyclical upturn is expected to provide further uplift to the current high factory utilisation rates (>70%). We believe competition would be rational among the suppliers, given the elevated capacity utilisation rates across the semiconductor industry,” he explains.
UMS’ strong cash position and consistent dividends round out the analyst’s recommendation. “As at end-FY2020, UMS had amassed a net cash pile of $32.8 million. Additionally, UMS has an exceptionally strong track record of generating positive free cash flow over the past decade, averaging $31.5 million between 2009 and 2020, which ranged from $12.3 million in 2009 to $51.4 million in 2019,” he says.
“While dividend per share is anticipated to stay low in 2021/22 due to capital investments, we believe UMS would still be able to dish out 4 cents in the next two years, which translates to a payout ratio of 32-37%,” he adds. The estimated dividends translate to a yield of 3.5%.
Ho’s target price of $1.65 is based on FY20201 P/E of 14.9 times 2021F PE. He views current valuations of 10.9 times forward P/E as attractive, given that the “cyclical upturn for the semiconductor industry is underway”.
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“Additionally, the 16.4% discount to peer average is unwarranted, given the superior net margins UMS has achieved consistently,” he adds.
As at 10.49am, shares in UMS are trading flat at $1.26.