• We believe semiconductor sales may have bottomed. WSTS estimates show a rebound to 4.8% y-o-y revenue growth in 2020.
• As such, we expect UMS (SGX:558) to report better y-o-y and q-o-q earnings growth when it releases its 3Q19 results on 12 Nov.
• Premised on our view of an industry recovery, we lift UMS’s FY19-21F EPS with a higher Target Price.
• What is uncertain is how strong this recovery will be.

We Think the Industry Has Bottomed

• We believe semiconductor sales have bottomed and are on their way to a gradual recovery in 2020.
• World Semiconductor Trade Statistics (WSTS) forecasts as at 27 Aug 2019 show global semiconductor sales declining 13.3% y-o-y in 2019, after growing 13.7% in 2018. For 2020, WSTS expects global semiconductor sales to grow 4.8% y-o-y.

Some Evidence From TSMC

• In its 3Q19 earnings guidance, TSMC (2330 TT) raised its 2019 capex guidance by US$4bn to between US$14bn and US$15bn. TSMC expects a similar capex level in 2020. The rise in capex was due to TSMC’s view that the outlook for 5G deployment in 2020 is now stronger and that TSMC has experienced significant demand for its 7-nanometer and 5-nanaometer production capacity.

SOX Hits 52-week High in the US

• In the US stock market, the Philadelphia Semiconductor Index (SOX) has been re-testing its 52-week highs. The SOX is the weighted index comprising companies in the semiconductor industry. Applied Materials Inc (AMAT US), UMS’s major customer has also seen its share price hitting a 52-week high on 15 Oct 2019.

We Raise FY19-21F Earnings …

• Given our view that a gradual recovery is underway for the semicon industry, we raise our revenue forecasts for UMS by 2.3-3.6% over FY19-21F. This results in a 6.1% to 8.9% increase in our core EPS forecasts for the period.

… Leading to a Higher TP

• Our target P/BV increases to 1.40x (ROE: 13.3%, COE:10.4%) as we raise our earnings estimates. Our previous target P/BV was 1.24x. As we roll over to FY20, our Target Price rises to S$0.67, based on FY20F BVPS of S$0.48.
• Better-than-expected order momentum from its major customer is a key upside risk to our earnings forecast. Unexpected pull-back in orders by its major customer is a downside risk.

UMS to File 3Q19 Results on 12 Nov

• Given our view that the semiconductor industry has bottomed, we think that UMS could report both y-o-y and q-o-q growth when its 3Q19 results are released on 12 Nov. To recap, UMS reported a net profit of S$8.1m in 2Q19, and S$7.6m in 3Q18.
• See UMS Holdings Announcements; UMS Holdings Latest News.

Source: CGS-CIMB Research - 23 Oct 2019