CGS-CIMB’s William Tng has upgraded his rating on UMS from “hold” to “add” on the back of better-than-expected 3QFY2020 earnings, along with a raised target price of $1.27 from $1.10.
UMS’s revenue rose 37% y-o-y to $45.2 million in 3QFY2020, beating the brokerage’s and Bloomberg consensus’ expectations at 29% of Tng’s FY2020F forecast.
Tng said despite higher revenue contribution from lower margin system integration sales, the group’s gross material margin was still respectable at 55.3% in 3Q0220, compared to 54.9% in 3QFY2019.
The improvement in the gross material margin was due to productivity gains and cost reductions. The share of earnings of associate JEP Holdings fell 43% y-o-y to $0.4 million, which was “better-than-expected” as government grants and better performance in its precision engineering business at JEP offset the revenue decline in its aviation business.
He noted the company’s further cut of its dividend from 1 cent to 0.5 cents, cited the company’s “desire for greater financial flexibility to take advantage of new growth opportunities in the short-term”.
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Tng said given its high single customer concentration risk, UMS has been diligently on the lookout for opportunities to diversify its business.
“Although no details were released, we think that the need to cut dividend suggests that any opportunity that materialises could require more significant capex (capital expenditure) on UMS part,” he added.
As such, he has cut his FY2020-2022 distribution per share (DPS) from six cents previously to four cents. If the diversification does not take place, he thinks DPS will revert back to six cents.
Separately, Maybank Kim Eng’s Lai Gene Lih maintained his “buy” rating and raised his target price to $1.41 from $1.36.
Lai broadly agreed with the points above, and noted revenue was driven by sales to key customer AMAT, on the back of robust global semiconductor equipment spending.
AMAT reported beats on 4QFY20 top and bottom-line. It is also guiding for its semiconductor systems revenue to grow 12% q-o-q.
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Meanwhile, industry association SEMI is projecting global fab equipment spending to grow 13% in 2021 to US$67.7 billion, on the back of pandemic induced demand for chips, from gaming, communications, IT infrastructure, data centres and healthcare electronics.
DBS Group Research’s Ling Lee Keng maintained her buy rating, although she lowered her target price slightly from $1.37 to $1.36.
She said UMS is in a “sweet spot” to ride on the strong global chip demand, on the back of the acceleration of 5G, artificial intelligence (AI) and other technology-driven developments.
Ling also noted US semiconductor equipment billings remain strong, and marked its 12th consecutive increase in September 2020, up 40.3% y-o-y. She said “We are more bullish and expect UMS to benefit from the positive developments in the semiconductor industry.”
As at 2.58pm, shares of UMS traded at $1, with a FY2020 price to book ratio of 1.9 and dividend yield of 4.2%
