Affected by strong macro headwinds despite healthy orderbook
Downgrade to HOLD with lower TP of S$1.14 on strong headwinds. With the strong macro headwinds including rising interest rates, weakening demand for consumer electronics, and geopolitical risks coming in fast and furious, UMS is not spared, despite its healthy orderbook. Its key customer, Applied Materials (AMAT) has lowered its 4Q22 outlook on the back of the export restrictions to China. Others such as TSMC and Micron have also cut their capex requirements.
With a further de-rating for the technology sector, we have lowered our valuation peg to 9x on FY23F earnings, vs. 15x previously. Hence, TP is lowered to S$1.14.
Global semiconductor shipments entering negative growth territory. Worldwide semiconductor shipments have eased from the peak of c.30% y-o-y growth in December 2021 to flattish growth in August 2022, according to data compiled by the Semiconductor Industry Association (SIA). With the ongoing macro headwinds, we expect worldwide semiconductor shipments to dip further in the next few months.
Downtrend should be shorter than the upcycle.
Based on the last few years, the upcycle (positive y-o-y gain) lasted about two to three years, followed by about one year of weakness (negative y-o-y growth). We expect a similar trend this time round, supported by the structural shift in demand post pandemic. Shipments could ease to around the pre-pandemic level of about US$30bn to US$40bn
Lower shipment leading to negative revenue growth in 2023. Lower shipments would also lead to lower revenue. According to forecasts by Gartner, overall semiconductor revenue will grow 4.0% in 2022 followed by a 3.6% decline in 2023 (vs. previous forecasts of 7.4% and -2.5%). Forecasts have been revised down to account for a deterioration in the macroeconomic environment and weakening consumer demand.
Not spared from sector sell down, despite strong orderbook. UMS’s orderbook remains strong with high utilisation rate, especially for the integrated system division. The group is still trying to meet its order backlog.
However, with the growing macro headwinds, UMS, together with other technology stocks such as its key customer, Applied Materials (AMAT), are not spared from the macro headwinds including rising interest rates, weakening demand for consumer electronics, and geopolitical risks. AMAT has just lowered its 4Q22 outlook on the back of the export restrictions to China. Under the latest regulations, US companies must cease supplying Chinese chipmakers with equipment used to produce advanced chips unless a license is obtained.
Risk of steeper cut in capex. With a macro situation that is deteriorating faster than expected, there could be a steeper cut in capital expenditure (capex) going forward. On the back of weak consumer sentiment toward consumer electronics, some companies, like Micron Technology, are already cutting FY23 capex significantly by over 30% y-o-y and reducing utilisation in its plants. TSMC has cut its capex for 2022 by at least 10% to around US$36bn, on the back of demand weakness and rising macro headwinds. In July, TSMC already shaved US$4bn off its capex.
Overall, Gartner expects capex spending to dip 10.1% y-o-y in 2023 and resume growth in 2025.
Beneficiary of trade diversification. In the longer term, UMS’s new Penang factory, which is scheduled for completion by end-2022, would be able to service customers looking to diversify their manufacturing base out of China, in view of the heightened geopolitical risks. The new factory, which is about 60% of the current space, will substantially increase the production capacity and position the group well to take on new orders, both from existing and potential customers that are expanding in Southeast Asia.
Cut to HOLD with a lower TP of S$1.14. For FY22F earnings, we have included the tax writeback provision of S$15m since the group has already received approval for the reinstatement of pioneer tax status for one of its Malaysian subsidiaries. Hence, FY22F earnings were raised by 15%. We trimmed FY23F revenue and earnings by 6%-7% on the back of the strong macro headwinds. TP is lowered to S$1.14 (previously S$1.83). We roll forward our valuation to FY23F, pegged to 9x PE, c.-1SD of the 5-year average PE (vs. 15x) given the further de-rating for the technology sector.