• UMS (SGX:558) delivered record 1H22 results. 1H22 topline (S$171m) and bottomline (S$40m) came in at 46% and 57% of our estimates. Revenue growth of 40% were driven by sustained demand for both its semiconductor integrated systems and components, consolidation of JEP (SGX:1J4)’s results and contributions from its subsidiaries.
• UMS's 1H22 net profit increased 34% y-o-y, slightly impacted by rising material and operational costs which brought down pretax margin from 33% to 31%. Nevertheless, margin has since normalised as gross and pre-tax margin has stabilised (2Q22: 52%/31% vs 1Q22: 51%/30%).

Q-o-q Growth of Its Semicon Sales Still Intact as 2Q Grew 7%

• We can expect a stronger 2H22 as UMS’s key customer has maintained an upbeat order forecast with an expected ~2% q-o-q growth in its 4Q. Despite lowering of CAPEX plans from some chipmakers, semicon equipment makers such as ASML and Lams research are still showing optimistic numbers in terms of net bookings and upcoming quarter sales guidance. As such, macro outlook is still in favour of UMS.

Plans to Onboard New Customer Is in Good Progress

• UMS's new Penang plant is set to finish construction by end FY2022. Contribution from this front-end semicon customer is a key growth driver for UMS in FY23. It will also help to cushion the impact of customer concentration in a slowing market environment.

Maintain BUY Recommendation on UMS

• UMS has stocked up on its inventory which insulates it from fluctuation in input materials’ prices. Manpower costs are unlikely to increase further as shortage of workers eases. Manpower constraint is previously the limiting factor to production output. We can expect this issue to progressively improve as UMS can now recruit more foreign workers following the deferment of 80 (local):20 (foreign) employment policy to end 2024 in Malaysia workers’ entry into Malaysia.
• We lower FY22E/FY23E effective tax rate to align with 1H22’s ~20%. In accordance to higher expected output from robust order forecast, we raise our FY22E revenue forecast for UMS marginally to S$371.6m (+1%).

• Going forward, US’ US$52b commitment under the CHIPS Act will support spending from chipmakers to install capacity in the US. This will lend support to demand for front end semicon equipment.

Source: SAC Capital Research - 22 Aug 2022