Customer diversification catalyst
- We hosted UMS Holdings Ltd (UMS) for our Mini Tech Conference in Malaysia on 22 Sep 2022.
- Participants were keen to understand more on the customer diversification potential with its new 300,000 sq ft plant.
- Reiterate Add. Our TP remains at S$2.17.
Key points from our tech conference
? Outlook: Management remained positive on the outlook for 2H22F. It reiterated its 2Q22 results commentary that order forecasts from its key customer remained strong as its customer continued to be supply constrained. Furthermore, the customer has also announced accelerating technology inflections which will enable it to outgrow the semiconductor market in the years ahead.
? Taxation: UMS also explained that it will be writing back tax provisions amounting to S$15.0m in its upcoming 3Q22F results. The group now has until end-2024 to fulfill the requirement of having Malaysians account for 80% of its workforce. UMS will also submit another application to extend the pioneer tax status of its Malaysian subsidiary (Ultimate) for an additional five years from 2023 to 2027.
? Dividend policy: UMS does not have a formal payout ratio-based dividend policy. However, since 15 May 2012, the company has adopted a dividend policy of declaring dividends on a quarterly basis. Over FY17-21, UMS declared total annual dividends at the rate of c.43-73% of the net profit after tax. Despite our projection of net profit growth over FY22-24F, we maintain our DPS forecast at 5.0 Scts in FY22-24F as we think UMS will allocate capital to grow the business opportunity with its new 300,000 sq ft plant.
? Customer diversification: At end-1H22, the semicon segment accounted for 87% of revenue with one key customer. UMS has a c.500,000 sq ft plant mainly dedicated to serve this customer. UMS is targeting to have a new 300,000 sq ft plant ready by end2022F and is in active discussions with a new semicon customer to dedicate this plant to their needs. As the new plant is 60% of the existing plant’s size, we think that meaningful customer diversification can be achieved over time if negotiations with the new potential customer are successful. Management also discussed the risk factors involved such as a) delay in completion of the construction of the new plant by end2022, b) difficulty in hiring workers, c) delays or changes to the plans of the potential new customer, and d) long lead time for production equipment order. Management was less worried on this risk as it has pre-ordered the equipment.
Reiterate Add
? Our TP remains at S$2.17, based on 15.0x (2 s.d. above its Jan 2017 to Aug 2022 P/E multiple) on our FY23F EPS. The +2 s.d. valuation is backed by 25.9% FY21-24F EPS CAGR.
? We reiterate our Add call given its EPS growth potential and customer diversification rerating catalyst.
? Re-rating catalyst: securing new customers for its new Penang plant.
? Downside risks are a) order deferments by its key customer leading to revenue and
hence net profit decline, b) delays in the completion of the new 300,000 sq ft plant, and
c) failure to secure the new potential customer.
