UMS: Well-positioned for semicon recovery -- but share price has risen 15%

THE CONTEXT • Not unlike AEM Holdings, another Singapore-listed tech company, UMS Holdings, is heavily exposed to a single client -- Applied Materials (AMAT), in this case. AMAT accounts for something like 90% of UMS's revenue.  • So, not surprisingly, when AMAT, in August 2023, guided for a better-than-expected 4QFY23, the stock of UMS started an upturn -- from $1.10 and reached $1.26 recently.  AMAT's guidance was for net sales of US$6.51 billion (+/-US$400 million) in 4Q, compared to the Zacks Consensus Estimate of US$5.87 billion.  • UOB KH today has a report recommending a 'buy" on UMS stock. And last Friday (15 Sept), DBS Research named UMS as its "preferred pick" to ride the semiconductor recovery. The current stock price is only a whisker away from their target prices, which makes one hesitate to jump in now, unless one is a long-term investor. • Read more of what UOB KH has to say below....

Excerpts from UOB KH report
Analyst: John Cheong

Well-positioned For Semiconductor Industry Recovery And Boost From New Customer

 
• Key customer’s better-than-expected guidance indicates improving demand for chips and should benefit UMS.

Andy Luong, who is concurrently executive chairman-CEO of both UMS and JEP. UMS Holdings (UMS) is well-positioned to benefit from an improving outlook of its key customer Applied Materials (AMAT).

In Aug 23, AMAT reported earnings that beat analyst estimates, and also guided for earnings in the coming quarter to be around 10% higher than analyst estimates.

This is mainly due to improving demand from AI-related chips and increasing orders from customers in China who are looking to increase purchases of equipment that are capable of older manufacturing processes.

AMAT also highlighted that over the past few years, it has focused its strategy and investments on key technologies to accelerate the Internet of Things and AI era, enabling AMAT to consistently deliver strong results.  

.... seeking to expand in Malaysia and is expected to contribute meaningfully from 2024 onwards.

Our recent channel check suggests that UMS’ new customer (Customer L) is seeking more production capacity from several local semiconductor-related manufacturers to support its expansion/relocation of its Malaysian operation. 

UMS estimates that this new customer should contribute at least US$30m in 2024, which will make up a meaningful 11% contribution to our 2024 forecasted revenue.

For the longer term, UMS targets to grow Customer L’s contribution to around the level of its existing largest customer.


• SEMI expects global fab equipment spending to recover in 2023. In the 12 Sep 23 quarterly World Fab Forecast Report by Semiconductor Equipment and Materials International (SEMI), global fab equipment spending for front-end facilities in 2023 is expected to decline 15% yoy before rebounding 15% yoy in 2024.

Next year’s fab equipment spending recovery will be partly driven by the end of the semiconductor inventory correction in 2023 and strengthening demand for semiconductors in the high-performance computing (HPC) and memory segments.

The 2023 decline in equipment investment is proving shallower than expected, while the rebound in 2024 should be better than expected.

The trend suggests the semiconductor industry is turning the corner on the downturn and on a path back to robust growth, fuelled by healthy chip demand.

EARNINGS REVISION/RISK

• We raise our 2024/25 earnings estimates by 17%/14%, after raising our revenue estimates by 4%/3% to factor in the potential recovery in the semiconductor industry from AMAT’s improved guidance.

We also raise our gross margin assumption by 1.5% to 48.5% to account for better operating leverage from improved revenue.  

Full report here