SINGAPORE (March 2): DBS Group Research has upgraded UMS Holdings, the precision engineering group for the semiconductor industry, to “buy” with a higher target price of 73 cents, from 61 cents previously.
This is on the back of better earnings visibility from the successful renewal of its contract with Applied Material’s Endura, and comes amid an improved outlook for the global semiconductor market.
US-based Applied Materials accounts for some 90% of UMS’s revenue and profit on average, according to DBS analyst Paul Yong.
Yong notes that UMS is involved in the manufacture of components for various semiconductor equipment and handling close to 70% of manufacturing and assembly for Applied Material’s Endura deposition system.
“UMS should naturally benefit from the positive semiconductor industry outlook, with earnings visibility strengthened by the successful renewal of the Endura contract by 3+3 years to Jan 2023,” Yong says in a Wednesday report.
On top of these, the analyst says UMS is supported by consistently strong cash flow generation as well as a strong net cash position of $42.4 million – close to 15% of its market cap.
“We think UMS would be able to sustain its dividends of 6 cents per share ahead, which represents a current yield of nearly 9%,” says Yong.
Taking into account all these positives, Yong believes UMS is “primed for [a] takeover”. In addition, he notes that the group has only one large shareholder with a 20% stake.
“With the renewal of the Endura contract providing good earnings visibility, consistently strong cash flows and net cash of $42.4 million – and growing – we now see UMS as an attractive takeover target,” says Yong.
Meanwhile, Yong adds that UMS remains on the lookout for diversification opportunities outside of the semiconductor industry with good long-term growth potential.
UMS in Jan 2016 acquired a 10% stake in aerospace component manufacturer All Star Fortress.
(See UMS buys 10% stake in M'sian aerospace metallic component maker)
It has also proposed the acquisition of a 51% stake in water and chemical engineering solutions company Kalf Engineering.
“These new avenues of growth could help drive further re-rating of the share price,” Yong says.
As at 1.01pm, shares of UMS Holdings are trading 1 cent higher at 69 cents.
