CGS-CIMB Research analyst William Tng is staying “add” on UMS Holdings 558 with a higher target price of $1.49 from $1.19 ahead of its results for 3QFY2023 ended September, as he eyes a FY2024-2025 recovery for the front-end semiconductor industry. The new target price represents an upside of 12.9% against its last traded price of $1.32.
UMS will release its results on Nov 10. Tng expects UMS to report quarterly revenue of $72.7 million, up 5% q-o-q but down 27.3% y-o-y; and net profit of $12.2 million, up 5% q-o-q but down 71.3% y-o-y. The 3QFY2022 results were a high base as net profit of $42.5 million benefitted from a tax credit of $11.9 million.
Tng also expects UMS to declare dividend per share (DPS) of 1.2 cents.
“According to our US joint venture (JV) partner, Raymond James (RJ), Applied Materials (AMAT, UMS’s key customer) is well-positioned to benefit from megatrends such as artificial intelligence (AI), electric vehicles (EV), advanced driver assistance systems (ADAS) and industrial automation,” writes Tng in an Oct 17 note. “RJ expects wafer fab equipment (WFE) spending to trough in 2H2023 and y-o-y growth to resume in 2H2024, setting the stage for a multi-year cyclical recovery.”
RJ’s view is also in line with that of Semiconductor Equipment and Materials International, which predicts that global fab equipment spending for front-end facilities is expected to decline 15% y-o-y to US$84 billion ($115.38 billion) in 2023, from a record high of US$99.5 billion in 2022, before rebounding 15% y-o-y to US$97 billion in 2024.
With WFE spending expected to recover in FY2024, Tng thinks UMS should face less pricing pressure from customers. “Hence, we raise our gross material margin assumptions by 0.3%-1.1% pts, leading to a 1.1%-4.6% increase in our FY2024-2025 core earnings per share (EPS) forecasts.”
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Tng is also rolling his valuation over to FY2025, valuing UMS at 12.0x calendar year (CY) 2015 price-to-earnings (P/E), given the potential upswing in net profit. “We reiterate our ‘add’ call given UMS’s potential for EPS growth and initial success in customer diversification,” writes Tng.
UMS, in its 1HFY2023 results release, guided that a new customer could contribute at least US$30.0 million in revenue for FY2024.
Re-rating catalysts include UMS securing more new customers and further orders from new customers for its new Penang plant, improving factory utilisation rates, return of orders for aircraft components benefitting its aerospace division and better-than-expected cost management.
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On the other hand, downside risks include a negative impact from its key customer’s loss of sales to China, slower-than-expected rate of return of orders from customers and UMS’s failure to secure enough orders for its Penang plant or an increase in price competition as other suppliers in Penang ramp up production.
Shares in UMS were trading 1 cent lower, or 0.77% down, at $1.29 prior to the Singapore Exchange S68 ’s mid-day break at 12pm on Oct 19.
