Growth momentum remains strong
Another record quarter, driven by strong demand
A strong set of 2Q22 results; above expectations. UMS set another record high, with 2Q22 net profit jumping 19.4% y-o-y (+4.2% q-o-q) to S$20.2m. This was achieved on the back of a 29.7% y-o-y (+2.2% q-o-q) surge in revenue to S$86.6m. Within the semiconductor segment, revenue for the integrated system division rose 11% y-o-y to S$32m while component sales surged 46% to S$43.6m. The jump in component sales is attributed to the growth of UMS’s semiconductor component business, as well as the consolidation of JEP’s semiconductor component business.
For 1H22, net profit leapt 23% y-o-y to S$39.5m on the back of the 47% surge in revenue to S$171.3m. Net profit and revenue account for 59% and 53% of our full-year forecasts, respectively, above expectations. The strong semiconductor demand worldwide, coupled with favourable tailwinds in the recovering aerospace sector have propelled 1H22 results to reach a new high.
An interim DPS of 1 Sct was declared, similar to 1H21.
Growing contribution from non-semiconductor segment. 1H22 revenue from the non-semiconductor segment, which includes the aerospace division (JEP Holdings) and other subsidiaries such as Starke material distribution and Kalf Engineering, surged >200% and accounts for 13% of total revenue in 1H22, vs. 10% in 1H21.
Stable margins. The gross profit margin of 51.7% for 2Q22 is comparable to the 51.8% recorded in 2Q21. The net margin of 23.3% in 2Q22 (25.3% in 2Q21) remains healthy despite the surge in the tax rate to 21% from 13% in 2Q21.
Pioneer tax incentive issue not resolved yet. The group is currently still in discussion with the relevant Malaysian authorities with a view to achieve a favourable outcome on these tax issues. The pioneer tax incentives for one of its Malaysian companies had expired during the year, while the other Malaysian subsidiary was unable to comply with the stipulated local employee criteria (due to the ongoing labour crunch in Penang) to qualify for the pioneer tax incentive.
Healthy order forecasts from key customer. The group’s order forecasts remain strong, as its key customer has a bright outlook, expecting sales to increase despite the impact of the ongoing supply chain challenges in FY22. This bodes well for UMS. The growth momentum is expected to be strong in the coming months.
Growth momentum remains strong; expect a better 2H22. The utilisation rate remains high, especially for the integrated system division. Demand remains strong and the group is still struggling to meet its order backlog. Hence, we can expect a stronger 2H22 vs. 1H22.
Semiconductor industry remains positive despite slower growth ahead. According to SEMI, global semiconductor equipment sales are forecast to rise 14.7% y-o-y in 2022, and about 3% in 2023 to reach $120.8bn. However, near-term challenges such as supply disruptions and rising inflation persist. Some global chipmakers have softened their forecasts and scaled down their capex plans in view of the expected global economic slowdown.
Expansion plans for UMS intact. UMS will carry on with its expansion plans, with its new Penang factory scheduled for completion by end-2022. This will substantially increase its current production capacity and position the group well to take on new orders from potential customers that are expanding in South-east Asia.
Maintain BUY, target price raised to S$1.83.
We have raised our revenue estimates by 10% each for FY22F/23F on the back of the strong demand. Net profit has been increased by 22% each for both years. The group has delivered a net margin of 23.1% for 1H22, despite the higher tax rate. We have raised our net margin assumption to 23% for both years, from 20.7%/20.8% for FY22F/FY23F previously. As a result of the higher earnings, the target price is raised to S$1.83 (previously S$1.70), pegged to its peak valuation multiple of 15x, on FY22F earnings. Maintain BUY. A favourable outcome from the pioneer tax incentive issue, which is still pending resolution, would provide further uplift to net earnings.