SAC Capital analyst Lim Shu Rong has upgraded UMS Holdings to “buy” with an increased target price of $1.55 from $1.39 after the company’s results for the 1QFY2022 ended March exceeded her expectations.
For the quarter, UMS’s revenue rose 71% y-o-y to $84.7 million, which stood at 28% of Lim’s full-year estimates.
UMS’s net profit for the 1QFY2022 increased by 26% y-o-y to $19.4 million, which stood at 34% of her full-year estimates.
The higher figures were attributable to higher semiconductor sales, consolidation of JEP’s results, and larger contributions from other subsidiaries such as Starke and Kalf.
JEP, a solution provider of precision machining and engineering services, is a Catalist-listed company that was acquired by UMS Holdings in 2021. JEP is a subsidiary of UMS, of which it holds a 72.01% stake in.
On this, Lim has upped her revenue estimates by 24% for the FY2022 to take into account robust sales and higher contribution from its subsidiary, Kalf, with two more projects expected to be completed by FY2022.
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JEP’s earnings were consolidated from 2QFY2021. The smaller growth in net profit was due to a higher effective tax rate of 18.6%, as the company assumed higher tax payout if their appeal is not granted.
Gross margins stabilised at approximately 51% and can be maintained despite an inflationary environment observes the analyst.
Lim sees that the group can generally pass on to consumers the hike in prices of commodities used to produce component parts. “As UMS Holdings sources from a list of vendors approved by Applied Materials (AMAT), any cost increase can also be passed through,” Lim explains.
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Despite shortages in certain parts, UMS Holdings contractually is allowed to ship the incomplete sets of the integrated system, where the missing parts will be delivered directly to AMAT once made available. To work around supply chain bottlenecks, AMAT is merging system modules onsite at foundries. “As such, delivery of systems from UMS Holding’s end is unlikely to stall,” the analyst adds.
Management is optimistic that the contract will be renewed. “Given that the main challenge AMAT faces is securing parts, we believe the current supply chain dynamic works in UMS Holding’s favour,” Lim says.
However, production output continues to be capped by the group’s labour resources. The tight labour market has seen companies in the industry paying wages exceeding the recent minimum wage of RM1500 ($469).
According to Lim, the Group is expected to incur higher labour costs to attract skilled workers, though the impact of labour constraints is mitigated as UMS Holdings capitalises more on JEP’s production capacity.
As at 10.38am, shares in UMS Holdings are trading at 3 cents up or 2.56% higher at $1.20 at a FY2022 P/B ratio of 2.5x and dividend yield of 5.6%.
Photo: Albert Chua/The Edge Singapore
