Raising Target Price of UMS to Capture Upside Potential; BUY

• We see several factors that may translate to upside for UMS (SGX:558). These include:
  1. potentially underappreciated FY21E revenue momentum;
  2. room for increased volumes as Lam sets up shop in Penang; and
  3. potential for new customer win that could drive long-term growth.
• As such, we now value UMS at 15x FY21E P/E (1.5 standard deviation above 5-year mean), from ROE-g/COE-g derived 2.5x FY21E P/B, as our previous approach does not capture these upside drivers that are hard to quantify.
• BUY with higher target price of S$1.57 for UMS.

Strength in Current Cycle

• Consensus expects Applied Materials (AMAT) revenue to grow 26% y-o-y in FY21. Within this, the semi systems segment is expected to grow 35% y-o-y. AMAT also expects PVD (of which Endura caters to, and UMS is a supplier for the Endura platform) to grow 40% y-o-y.
• We see consensus revenue growth for UMS of 16% y-o-y for FY21 as undemanding against AMAT’s strong backdrop, and see possibility for upward revisions as the year progresses. AMAT expects the current strength to last into 2022.

Other Upside Drivers for UMS

• Much of UMS’s volume production takes place in Penang, Malaysia. Lam Research (AMAT’s closest competitor), recently topped out its new US$225m manufacturing facility in Penang. As Lam would likely have to build up its supply chain, and AMAT has cut 4Q20 dividend to S$0.01 per share (4Q19: S$0.025). We believe this signals efforts to court new business opportunities are ongoing and UMS would need to expand capacity if this materialises.

Reduced Cyclicality May Infer Higher Valuations

• AMAT believes it is in the early-innings of a decade-plus investment cycle amid inflections like Big Data, AI and UMS, in turn providing room for its stock to enjoy higher multiples.
• Key risk is if we have overestimated margins or underestimated effective tax rate.

Source: Maybank Kim Eng Research - 14 Mar 2021