2H23 recovery intact; stronger 2024 expected
2H23 recovery intact with strong q-o-q performance in 3Q23
- 2H23 recovery intact, with strong performance q-o-q
- 3Q23 margins improved, partly due to the renewal of its contract with key customer
- Semiconductor industry recovery intact; upcycle to continue through 2026
- Earnings revised down by 12%/5% for FY23F/24F on weaker 9M23 results; maintain BUY with higher TP of S$1.55 on improving outlook
Though 3Q23 results were below expectations, it was still a strong performance and 2H23 recovery remains intact. UMS reported a 3Q23 revenue of S$71.3m, down 28.8% y-o-y. The quarterly decline in revenue narrowed to 4.2%, from a decline of 7.9% in 2Q23 and 20% in 1Q23. The weaker performance was due to lower sales in both its semiconductor integrated system sales and component sales. System sales fell 25% y-o-y to S$33.3m, while revenue from component sales dropped 34% y-o-y to S$29.7m. This was partially lifted by a better performance from its aerospace business, which saw revenue jumping 35% y-o-y to S$5.2m, buoyed by the sustained recovery of the global aerospace industry.
3Q23 net profit plunged 64% y-o-y to S$15.3, partly due to the tax writeback in 3Q22. However, on a q-o-q basis, it was up 32%, indicating that 2H23 recovery is intact. On a 9M23 basis, revenue of S$226.4m fell 17% y-o-y, while net profit was down 46% to S$44.3m. Overall, 3Q23/9M23 net profit accounted for 23%/65% of our forecast, below expectations.
An interim DPS of 1.2sct (similar to 2Q23 but higher than the 1Sct in 3Q22) was declared.
Improving margins, partly due to the renewal of its contract with its key customer. 3Q23 gross margin improved to 51.2% from 46.3% in 2Q23 and 50.5% in 3Q22, mainly due to higher USD/SGD exchange rates and better margins arising from the renewal of its integrated system contract with its key customer. Net margin improved to 21.5% from 15.6% in 2Q23.
Completion of new plant offers new growth opportunities. With the completion of its new production facilities in Penang, the group is well poised to ride on the trade diversification trend on the back of the geopolitical uncertainties and the need to build a resilient supply chain. The new plant has a floor area of about 300,000 sq ft, vs c. 500,000 sq ft for the entire exiting group.
Semiconductor industry recovery intact; upcycle to continue through 2026. Global semiconductor shipments in Aug ‘23 showed further improvement from the low in Feb 23. 1) The y-o-y decline of 6.8% was lower than Jul’s 11.8% drop, and 2) it recorded the sixth straight month of m-o-m growth. According to Gartner, semiconductor revenue is expected to dip 12.3% y-o-y in 2023 after a flat 2022, and recover with a strong gain of 20.4% in 2024. SEMI expects a 2024 rebound to continue through 2026 with wafer shipments setting new highs as silicon demand increases to support artificial intelligence (AI), high-performance computing (HPC), 5G, automotive, and industrial applications.
Earnings revised down by 12%/5% for FY23F/24F on weaker-than-expected 9M23 results. We have reduced earnings for FY23F/FY24F by 12%/5% given the weaker-than-expected 9M23 results. Despite this, we continue to expect 2H23 recovery to be on track. We project a 4Q23 net profit of S$16m, a slight improvement from the S$15.1m in 3Q23. Our target price is raised slightly to S$1.55 (previously S$1.51) pegged to a higher PE of 13x, near the +1SD level from its four-year average, up from 12x as we expect outlook to improve. Maintain BUY. UMS remains our top pick in the sector.