- Following a sharp de-rating of its tech peers, we downgrade UMS (SGX:558) to HOLD as we think it should trade at a discount to its key customer. As a result, we lower our target P/E to 8.5x from 14.0x and cut our target price to S$1.20 from S$1.50.
- On a positive note, UMS will write-back S$15m in tax provisions in 3Q22 and will apply to extend its pioneer tax status in Malaysia for another 5 years to 2027. We raise our FY22 PATMI forecast for UMS by 31% and FY23F by 21%.
Major Players in US Trading at Lower Valuations
- After the recent correction, major chipmakers in the US are currently trading at significantly lower valuations. Despite a positive outlook for UMS, we think that its valuation will likely trade at a discount to its single-largest customer who is trading at 10x FY23F P/E and its potential future customer trading at 9x FY23F P/E.
- We believe that while UMS's order outlook remains robust, there is potential risk of delay or cancellation of orders if the global economy continues to slow.
New Penang Plant Aims to Drive Diversification
- UMS is building a 300,000 sqft plant in Penang due for completion by end-FY22F. Management says it is in active discussion with a new potential semi-con customer who it hopes will absorb the plant’s entire output. If successful, this would help UMS diversify away from its single-largest customer who currently generates more than 80% of revenue.
- A pact with the new customer would accelerate UMS's FY23F-24F revenue and profit growth.
Potential of Sharp Slowdown Makes Us Cautious
- As we have seen in many cycles, downswings in the semiconductor cycle can be swift and deep. We are thus taking a conservative approach and downgrading UMS to HOLD until clearer signals emerge.
- Refer to recent report: Venture Corp - Maybank Research 2022-10-07: A Beacon Of Light; One Of The Last Bastions. We prefer Venture Corp (SGX:V03) in the Singapore tech space for its diversification and resilience.
- We transfer coverage on UMS to Jarick Seet.
Source: Maybank Research - 12 Oct 2022
