Risks Priced In; Maintain BUY

• We trim UMS Holdings (SGX:558)'s FY20-22E EPS by 6-15% to factor in
  1. closure of UMS’ Penang facility amid a movement restriction order in Malaysia;
  2. AMAT’s withdrawal of 2QFY20 guidance due to supply chain and operational disruptions; and
  3. a shallower pace of semiconductor capex recovery amid increased uncertainties.
• Our ROE-g/COE-g Target Price falls to SGD0.96, now on 2x FY20E P/B (prev: 2.3x).
• Key risk is a prolonged economic downturn that weakens the drivers of the current capex recovery cycle.
• Maintain BUY.

Operational Updates

• UMS’ Penang facility is closed from 18-Mar to 14-Apr due to a country-wide movement control order.
• Notably, in an operational update on 25- Mar, UMS omitted the statement that it does not expect the temporary closure to result in “significant material financial impact” found in the 23-Mar update.
• While Micron’s (Applied Materials’ customer) unchanged FY20 capex guidance is a relief, it is adopting a flexible approach to capex vis-à-vis fluid demand dynamics. This may imply downside risks to rate of memory investment recovery, a driver of our thesis.

Clean Balance Sheet; 7% Yield Supported by FCF

• UMS has a clean balance sheet with net cash to equity of 9%. FY20E yield of 7% is also fully funded by FCF. A key risk to dividends is a more severe than expected economic downturn, as semiconductor equipment companies are highly cyclical.
• A mitigating factor is that recent cycles, and future ones are expected to be less pronounced amid more structural growth drivers such as increasing chip complexity and scaling challenges.

Forward P/B Comparable to Recent Downturns

• We believe the semiconductor equipment up-cycle is still intact. UMS is currently trading at 1.3x FY20E P/B, which is comparable to recent down-cycles, i.e. 2016 and mid-2019. Click view full report button below to see sensitivity analysis details and peer comparison table.
• UMS troughed at 0.2x forward P/B during the GFC. However, UMS was lossmaking then, while currently we still expect profitability to be intact.

Source: Maybank Kim Eng Research - 29 Mar 2020