• Based on forecasts and data from SEMI, the semicon industry is set for a recovery in 2020, benefitting UMS Holdings (SGX:558).
• Key risks are possible export restrictions and impact from a prolonged coronavirus situation.
• We reiterate HOLD with higher target price of SGD0.96, which assumes the risks mentioned above do not derail the semicon recovery.

Semicon Recovery in 2020 to Benefit UMS

• The semicon industry is on track for a recovery in 2020. According to Semiconductor Equipment and Materials International (SEMI), the global industry association representing the semiconductor manufacturing and design supply chain, global semiconductor manufacturing equipment sales will decline 10.5% y-o-y to US$57.6bn in 2019 from the 2018 historic peak of US$64.4bn but stage a 2020 recovery and set a new high in 2021.
• SEMI’s forecasts see global semicon equipment sales growing, registering a 5.5% rise to US$60.8bn in 2020 and expanding further into 2021.

Key Risks

• We see key risks in 2020 as possible export restrictions on US semicon companies’ export business with China as well as a global economic slowdown and production disruptions if the coronavirus issue drags on.
• We note that UMS remained profitable throughout the SARS period in Nov 2002 to Jul 2003. During that period, the share price hit a low about four months from the start of SARS (-18%) and rebounded 33% from this low at the end of the crisis. Over the SARS timeline, the share price gained 10%.

4Q19 Results Out 24 Feb

• We expect UMS to report 4Q19 earnings on 24 Feb.

Reiterate Hold; Technical Levels to Watch Are S$0.885/S$0.815

• The main driver behind the upward revision in our earnings forecasts lies in our gross material margin assumption. We now assume that the gross material margin will widen to 56.0%. The average gross material margin achieved during the last earnings upcycle in FY16-18 was 56.3%.
• Our Target Price of SGD0.96 is now based on 1.93x FY20F BVPS (Gordon growth model: ROE 16.1%, cost of equity 6.8%, 3.0% terminal growth). The previous Gordon growth model-derived P/BV was 1.60x. Our chartist thinks entry levels are at S$0.885/S$0.815.
• Our top pick remains AEM Holdings (SGX:AWX) (Rating: ADD, Target Price S$2.38).

Source: CGS-CIMB Research - 4 Feb 2020