• UMS Holdings's 2Q20 net profit at 28%/29% of our and consensus’ full-year forecasts was within expectations.
• The company declared a 1 Sct DPS in 2Q20. Its balance sheet was in a net cash position as at end-Jun 2020.
• Downgrade to HOLD from Add as the market appears to have priced in some of its higher earnings expectations. Our Target Price is higher at S$1.10.

UMS' 2Q20 Results in Line

• UMS Holdings (SGX:558)'s 2Q20 revenue at 29%/28% of our and consensus’ full-year forecasts was in line with expectations. Net profit for 2Q20 was also in line with our and consensus’ expectations at 28%/29% of full-year forecasts.
• A DPS of 1 Sct was declared as the group was in a net cash position at the end of Jun 2020. 2Q20 performance was helped by a 12% y-o-y increase in associate earnings.
• UMS Holdings's associate, JEP Holdings (SGX:1J4), benefitted from government grants to help combat the COVID-19 pandemic.

Outlook Remains Positive

• In a press release on 21 Jul 2020, SEMI (an industry association comprising companies involved in the semiconductor design and manufacturing supply chain) projected that the global sales of semiconductor manufacturing equipment manufacturing could increase 6% y-o-y to US$63.2bn in 2020, from US$59.6bn in 2019, followed by a 10.8% y-o-y growth to US$70bn in 2021. UMS Holdings expects to benefit indirectly from the vibrant chip equipment manufacturing market.
• In 2H20F, we believe UMS Holdings’s system integration business will see better results h-o-h while JEP Holdings could also breakeven, at worst, due to government grants and strong performance in JEP Holdings’s semicon-related business segment.
• A generally positive outlook from its key customer, Applied Materials, on CY21 also bodes well for UMS Holdings.

Downgrade to HOLD From Add

• We raise our FY20-22F EPS by 8.8-17.8% as we believe UMS Holdings will benefit from the current bright outlook for its key customer, Applied Materials. We also assume that UMS Holdings will revert to its historical full-year 6 Scts DPS (previous full-year DPS assumption was 5.5 Scts) payout given its rising free cash flow. Our Gordon Growth P/BV multiple rises to 2.30x (previously 2.02x). Our Target Price is raised to S$1.10 from S$0.96 previously.
• Given that the markets have priced in higher earnings expectations for UMS Holdings, we downgrade from Add to HOLD for its 5.6% dividend yield and await a better entry price.
• We note that in the last earnings upcycle in 2017, the highest P/BV multiple UMS Holdings re-rated to was 2.89x which would translate to S$1.38 based on our current FY20F BVPS of S$0.48.
• Key upside risk is stronger-than-expected recovery for the semicon industry.
• Key is disruption to the supply chain if the COVID-19 outbreak worsens.

Source: CGS-CIMB Research - 14 Aug 2020