1H22: Above Expectations; Benefited From Solid Semiconductor Demand Worldwide
1H22 earnings of S$40m (+23% yoy) are above our expectations, forming 65% of our 2022F estimate as UMS continues to benefit from solid semiconductor demand worldwide. UMS’s order forecasts remain strong as its key customer expects increased sales despite ongoing supply chain challenges. We raised our 2022 and 2023 EPS by 27% and 35%. Maintain BUY with a 3%-lower target price of S$1.40 (reduce PE peg to mean of 11x 2023F, from 2SD of 15.5x 2022F).
RESULTS
• 1H22 earnings benefited from solid semiconductor worldwide. UMS Holdings’ (UMS) 1H22 earnings of S$40m (+23% yoy) are above our expectations, forming 65% of our full year estimate as UMS continues to benefit from the solid semiconductor demand worldwide and favourable tailwinds in the recovering aerospace sector.
• Robust revenue growth across all sectors. For 1H22, semiconductor sales increased 41% to S$149m, while aerospace revenue more than doubled by 139% to about $7m. Sales in the “others” category jumped by 89% to S$15m. Semiconductor Integrated System sales grew 20% to S$62m. Component sales also shot up 62% to S$87m. All of UMS’s key geographies experienced growth. Malaysia and the “others” market reported the strongest growth, clocking in triple-digit sales increases. Revenue in Malaysia grew 131% and revenue in the “others” market vaulted 175% in 1HF22. Sales in Singapore went up by 47%, while revenue in Taiwan and the US increased by 18% each.
• UMS’s orders forecasts remain strong as its key customer expects increased sales despite the impact of ongoing supply chain challenges in FY22. Its key customer also announced that the accelerating of technology inflections will enable it to outgrow the semiconductor market in the years ahead. This strong customer forecast is good news for UMS’s growth momentum in the coming months. According to SEMI, global sales of total semiconductor manufacturing equipment by original equipment manufacturers are forecast to grow 14.7% in 2022 and 2.8% in 2023.
STOCK IMPACT
• Expansion to continue despite near-term challenges and softened forecasts by some global chipmakers. While the bullish SEMI forecast provides new oomph to the sustained semiconductor boom, 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. The Group, however, will carry on with its expansion plans with its new Penang factory scheduled for completion by end-22. This will increase current production capacity substantially and position the Group well to take on new orders from potential new customers which are expanding in South-east Asia.
Ongoing engagements with prospective customers are progressing well.
• There are bright sparks in the labour landscape in Malaysia as the Malaysian authorities have announced the easing of the 80-20 employment policy by two years and are opening up new sources for foreign worker recruitment. The Group has intensified its hiring progress since getting its quota approval to hire more foreign workers. Efforts to recruit local talent will persist. Although some challenges remain, the easing of foreign worker restrictions will help alleviate the tight labour situation in Penang.
EARNINGS REVISION/RISK
• We raise our 2022/23/24 earnings estimates by 27%/35%/32%, after raising our revenue forecasts by 19%/11%/4% to account for the stronger-than-expected 1H22 results and positive outlook from UMS’s key customer. Also, we raise our gross margin assumption to 50.0%/52.0%/52.0%, up from 51.0%/50.0%/49.1%, to account for better operating leverage from a higher revenue base.
VALUATION/RECOMMENDATION
• Maintain BUY with a 3%-lower target price of S$1.40 (from S$1.45), after lowering our PE peg to 11x based on mean PE, down from 15.5x, +2SD of historical average. This is to account for the late-cycle of the semiconductor industry, which is typically followed by a subsequent slowdown/decline in industry earnings. Also, we roll over our valuation base year to 2023F from 2022F.
SHARE PRICE CATALYST
• Higher-than-expected factory utilisation rates.
• Return of orders for aircraft components to benefit recently-acquired subsidiary JEP Holdings.
• Better-than-expected cost management.
