SINGAPORE (Nov 13): CIMB Research is maintaining its “add” call on UMS Holdings while raising its target price to $1.21 from $1.13, as it increases its P/BV multiple to 2.88 times versus 2.8 times previously on higher ROEs.

In a Friday report, CIMB analyst William Tng recalls how the semiconductor equipment manufactuer's recently reported net profit for 3Q17 came in above expectations at 34% of CIMB’s full-year forecast, and is at its highest since the research house initiated coverage on the stock in 2010.

In particular, the group’s gross material margin hit a high of 58.8% in 3Q on better-margin component sales, which accounted for 48% for total turnover during the quarter.

See: UMS Holdings 1H earnings double to $22.7 mil; proposes bonus issue and interim dividend

UMS’ strong 3Q performance, coupled with the management’s guidance of a strong pipeline of orders and lower costs in Penang, has therefore led Tng to further revise his FY17-19F core earnings per share (EPS) forecasts by 4-7% on the belief that core EPS could still grow y-o-y.

The analyst also thinks the group’s board “will need to deliberate” a higher special dividend per share (DPS) for the current financial year, given its record performance.

“UMS’ cash balance at end Sep-17 was $64.3 million. During the quarter, UMS took on $20.4 million in borrowings but the company remains in a net cash position. Free cash flow generated during the quarter was $6.5 million and during the first nine months was $23.7 million. In line with its past track record, an interim DPS of 1.0 cent was declared,” recounts Tng.

On the other hand, DBS Vickers Securities has upgraded its rating for UMS to "buy" from "hold" with a higher target price of $1.21 from 90 cents previously. The new target price is based on 12 times FY18F P/E, at a discount to larger peers' 15 times. 

In a separate report on Monday, DBS lead analyst Carmen Tay explains that the research house has assumed a larger discount to the peer multiple compared to consensus, given the stock's higher customer concentration risk. 

Noting how the positive earnings surprise this 3Q has reflected recovering order flows and improved business fundamentals as compared to a quarter ago, Tay says this eases earlier concerns on imminent market share losses such that DBS has raised earnings projects for FY17-19F by 23-31%. 

“SEMI predicts that global fab equipment spending could reach industry all-time highs of over US$55 billion in 2017 and US$58 billion in 2018. Reports by Applied Materials also imply robust demand and growth of c.10% CAGR into FY20F,” says Tay.

“This augurs well for UMS given its primary role in the manufacture of components for various semiconductor equipment and that it handles c.70% of manufacturing and assembly for Applied Material’s Endura deposition system – especially given the successful extension of the Endura contract,” she adds. 

As at 11.50am, shares in UMS Holdings are trading 3 cents higher at $1.05.