Prospects Still Positive; Maintain BUY

• Stakeholders see governance, economic performance, product compliance and customer privacy are the most important factors to ensure sustainability. In 2019, UMS Holdings (SGX:558) did not incur any significant environmental fines, and had zero reported incidences of discrimination or corruption. Related-party transactions were carried out carried at arm’s length.
• Key customer Applied Materials (AMAT) believes strong earnings momentum can be extended into next year.
• Maintain BUY on UMS Holdings with Target Price of SGD1.36 (2x FY21E P/B).

Arm’s Length Transactions

• Like other technology manufacturers, key governance risks that UMS Holdings faces include conflicts of interest, corruption and breach of confidential information. In 2019, UMS Holdings had related-party transactions with Sure Achieve Consultant (where the wife of the founder Andy Luong is a director), as well as with Kalf Engineering, where Mr Luong and Mr Stanley Loh (group financial controller) have an interest. However, these transactions were done on normal commercial terms.

Localisation Strategy for Workforce

• UMS Holdings adopts a localisation strategy for overseas operations to ensure on-the-ground teams have a good grasp of local socio-political and cultural sensitivities. UMS Holdings’ environmental exposure is primarily through energy, water and waste disposal.
• UMS Holdings did not meet its energy and water intensity targets in 2019. Hazardous waste from the production process is disposed of in compliance with regulations. Where possible, scrap materials are recycled.

Capitalising on Opportunities From Key Customer

• At a recent technology conference, key customer AMAT reiterated its optimism that this year’s revenue strength may be extended into next year, as customers continue to invest in roadmaps. Despite extreme ultraviolet (EUV) technology, AMAT is confident that its position will strengthen in future nodes from opportunities to co-optimise deposition and etch processes. We see UMS Holdings as a proxy for these trends.

Source: Maybank Kim Eng Research - 29 Sep 2020