Analysts are downgrading its calls and target prices on UMS Holdings after its key customer, Applied Materials (AMAT) lowered its outlook for its 4QFY2022 ended October, on the back of export restrictions to China.
Under the latest regulations, US companies must cease supplying Chinese chipmakers with equipment used to produce advanced chips unless a licence is obtained.
As such, AMAT lowered its sales guidance to approximately US$6.40 billion ($9.71 billion), with a variance of US$250 million. This is 3.76% lower compared with the previous figure of US$6.65 billion, with a variance of US$400 million.
On the back of the murky outlook, DBS Group Research analyst Ling Lee Keng downgraded her rating on UMS Holdings from “buy” to “hold”.
The analyst has also cut her target price to $1.14 from $1.83.
Similarly, CGS-CIMB Research analysts William Tng and Izabella Tan have maintained their “buy” call, but slashed their target price by almost 40% to $1.37 from $2.17 previously.
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In her report dated Oct 14, DBS’s Ling attributed her downgrade to strong macro headwinds, including rising interest rates, weakening demand for consumer electronics, and geopolitical risks.
Ling highlights that UMS’s relationship with AMAT is a “key client risk,” saying that historically, about 90% of UMS’s average revenue has been from AMAT.
“Disruptions to the relationship or weakness in AMAT’s end demand could significantly weigh on UMS’s performance.
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Other peers in the sector, such as TSMC and Micron have also cut their capital expenditure (capex) requirements, Ling points out.
Despite this, she notes that UMS’s orderbook remains healthy, and the group is still trying to fulfil its order backlog.
On a broader global view, she notes that global semiconductor shipments are also expected to turn negative after flattish y-o-y growth in August. “Based on the last few years, the upcycle lasted about two to three years, followed by about one year of weakness.”
CGS-CIMB’s Tng and Tan also noted the US chip-related rules, adding that AMAT said that the new regulations will reduce its 4QFY2022 sales by US$400 million, with a US$150 million variance.
China accounted for 33% of AMAT’s FY2021 sales, and the analysts say the restriction from selling to China will reduce AMAT’s total addressable market.
The analysts say that, “however, in our view, UMS’s net profit in FY2023 to FY2024 could still be driven by non- China domiciled fabs being built and successfully onboarding new front end semicon customers.”
If the semicon industry is headed for a decline in FY2023, Tng and Tan believe that UMS’s valuations could revert to its six-year average P/E multiple of 10.1x, leading them to lower their target price to $1.37.
“In the previously more bullish market environment, our TP of $2.17 was based on 15x P/E, or 2 standard deviation above its January 2017 - August 2022 P/E multiple,” the analysts write.
As of 10.35 am, shares of UMS were trading at $1.10, with a FY2022 P/B ratio of 2.17 and dividend yield of 4.59%, according to CGS-CIMB.
