• There have been indications from upstream foundries that the near-term supply shock from the chip shortage situation would transition into longer-term demand sustainability due to new emerging technologies. This will benefit UMS (SGX:558) and key client Applied Materials.
• UMS could surprise us with regard to our and street estimates of 2021 earnings, should factory utilisation rates stay elevated throughout the year. Maintain BUY with a higher target price of S$1.92.

What’s New

Supply squeeze from ongoing chip shortage; demand sustainability from capex guidance for the years ahead.

• The global chip shortage situation brought about by rising consumer demand for electronic products and supply disruption has positively impacted UMS’s key client, chip-making equipment producer Applied Materials (AMAT US, Not Rated).
• Also, in the recent 2QFY21 earnings transcript released by AMAT in May 21, the semiconductor giant disclosed that customers, for the first time, provided capital spending guidance for multiple years ahead, which will be a leading indicator for demand sustainability. This augments our thesis that: the ongoing massive capex spending, and supercycle in the semiconductor industry, will bode well for UMS, lifting overall factory utilisation rates and revenue above the S$200m mark for the first time in 2021 (2010-20 average revenue was S$124m; ranging between S$110 and S$164m).

TSMC, Samsung and Intel’s recent comments suggest rising capital spending to last till 2023.

• Furthermore, global foundry giants Taiwan Semiconductor Manufacturing Company (TSMC), Samsung Electronics and Intel Corp are AMAT’s Endura platform falls under.

Completion of general offer for JEP.

• The recent completion of the general offer for JEP (SGX:1J4) has resulted in the increase of shareholding in the associate’s shareholding from 40.7% to become a subsidiary with a 71.4% stake.
• For 2020, the specialist aerospace engineering firm recorded a net profit of S$0.3m (2019: S$6.5m), which included a S$4.0m payout of government grant support in relation to COVID-19. 2020 revenue slowed 17.6% y-o-y to S$73.3m, impacted by the pandemic.

Stock Impact

Positive operating leverage to improve bottom-line.

• The expected uplift in utilisation rates from fulfilling wafer transfer estimate of S$58.4m (+35.1% y-o-y).

Growing potential for 2021 earnings surprise.

• For 1Q21, PATMI accounted due to the impact of positive operating leverage.

Earnings Revision / Risk

• No changes to our forecasts.

Valuation / Recommendation

• Maintain BUY call on UMS with a higher target price of S$1.92 from share for 2021F.

Share Price Catalyst

• Higher-than-expected factory utilisation rates.
• Better-than-expected cost management.

Source: UOB Kay Hian Research - 30 Jun 2021