• UMS's 3Q19 results beat expectations, buoyed by both semiconductor and non-semiconductor segments.
• Expect growth momentum to at least be maintained in 4Q19.
• Improving outlook; renewed contract with key customer, AMAT for another three years.
• Tweaked earnings up by 6-7%; maintain BUY with higher Target Price of S$1.00.

Remain Positive on Semiconductor; Maintain BUY on UMS With a Higher Target Price of S$1.00

• UMS HOLDINGS (SGX:558) is now witnessing signs of an upturn in the overall semiconductor industry as demand is picking up with chip inventories easing and new technological disruptors driving the growth of new products and capabilities. The successfully renewed integrated system business contract with its key customer, Applied Materials, Inc. (AMAT), for another three years helps to strengthen earnings visibility.
• We remain positive on the turnaround for the semiconductor segment and expect the sales momentum to continue. Hence, we raised our earnings forecasts for FY19F-21F by 6-7%.
• Maintain BUY with a higher Target Price of S$1.00, pegged to smaller peers’ average of 13x PE. See UMS Holdings Share Price; UMS Holdings Target Price.

UMS 3Q19 Results Above Expectations

• UMS reported a strong set of 3Q19 results, buoyed by higher semiconductor segment demand and improved contributions from non-semiconductor businesses. 3Q19 revenue came in at S$32.9m (+12.4% y-o-y, +9.8% q-o-q), while net profits were S$9.2m (+20.9% y-o-y, +13.4% q-o-q). See UMS Holdings Announcements.
• Semiconductor segment accounted for 93% of the total revenue. Gross margins eased to 55% from 59% in 3Q18, due to a change in product mix with higher contributions from Semiconductor Integrated System sales which command lower margins compared to Component sales.
• An interim DPS of 0.5 Scts was declared, similar to 3Q18. See UMS Holdings Dividend History.

Expect Growth Momentum to at Least be Maintained in 4Q19

• Overall, 3Q19 revenue and net profit accounted for 26% and 28% of our previous FY19F forecasts, and 73% and 75% on a 9-month basis respectively. We deemed it above expectations as we expect the momentum to continue in 4Q.
• We are projecting a similar growth momentum as 3Q of 13% q-o-q to net profit of S$10.4m for 4Q19.

Associate JEP Did Well

• 9-month profitability was partly lifted by a 585% surge in its share of profits from its associate, JEP HOLDINGS (SGX:1J4). Contributions from JEP surged to S$1.9m as the company accelerated its profit growth in 2019. (see JEP Holdings Share Price; JEP Holdings Target Price).

Stable Demand for Singapore, Rest of Regions Still Weak

• Geographically, 9-month FY19 revenue in Singapore remained stable compared to 9-month FY18 due to similar demand for semiconductor integrated systems for both periods. Singapore accounted for 62% of the total revenue. All other markets, including US, Taiwan and Malaysia, registered lower sales.

Improving Outlook; Renewed Contract With AMAT for Another Three Years

• The semiconductor market appears to be bottoming out, with the overall oversupply in the memory market expected to ease. UMS is witnessing signs of an upturn in the overall semiconductor industry as demand is picking up with chip inventories easing and new technological disruptors driving the growth of new products and capabilities.
• UMS has also successfully renewed its integrated system business contract with its key customer, AMAT, for another three years. Earnings visibility is thus strengthened.
• According to SEMI, growth in equipment sales is expected to rebound in 2020 with an 11.6% rise to US$58.8 bn. SEMI predicts that the equipment market will recover on the strength of memory spending and new projects in China.
• We continue to expect a resumption of the growth in semiconductor equipment sales in 2020. UMS is a beneficiary of the turnaround in the semiconductor sector. A sustainable recovery should drive earnings, and thus share price higher.

Tweaked Earnings Up by 6% to 7%; Maintain BUY With Higher Target Price of S$1.00

• We revised up our FY19F/FY20F/FY21F earnings up by 7%/6%/6%, as we expect the growth momentum to continue.
• Target Price is raised to S$1.00 (previously S$0.87) on the back of the higher earnings and a higher peg to smaller peers’ average PE of 13x (previously 12x) on FY20F earnings, in line with the recent re-rating of the semiconductor stocks. See UMS Holdings Share Price; UMS Holdings Target Price.

Where We Differ

• We are more positive on the semiconductor outlook and expect UMS to trade in line with its smaller peers’ of 13x on FY20F earnings.

Source: DBS Research - 13 Nov 2019