UMS - DBS Research 2022-11-15: Customer Diversification Bearing Fruit

UMS - Customer Diversification Bearing Fruit

  • UMS (SGX:558)'s 3Q22 revenue surged 48.1% y-o-y and 15.6% q-o-q to a high of S$100.1m,driven by the robust expansion of global wafer fabs. Net profit jumped 180.5% y-o-y (+110.6% q-o-q) to S$42.5m.
    • Within the semiconductor segment, which accounts for 89% of total revenue, semiconductor integrated system sales more than doubled y-o-y, while component sales went up by 18% y-o-y. As a result of the slower growth for the component division, which typically accounts for a higher proportion, the split between system and component sales is the same for 3Q22.
    • The aerospace segment gained 23% y-o-y.
  • A dividend of S$0.01 was declared. See UMS's dividend history.
  • For the 9M22 period, revenue of S$271.4m (+48% y-o-y) exceeded the sales achieved in FY21 and accounts for 76% of our forecast, broadly in line. All core business segments of UMS reported stronger results.
  • Net profit for 9M22 soared 70% to S$85.8m while net profit before tax jumped 48% to S$84.3m. This was mainly due to the reversal of the tax provision made by its Malaysian subsidiary after the resolution of the pioneer tax incentives with the Malaysian Government, and also forex gain of S$2m, on the back of the strong US$.

Lower gross margin on higher material costs for new customers

  • Gross margin in 3Q22 eased to 50.5% from 54.4% in 3Q21, arising mainly from higher material costs for fabricating first articles for new customers. For 9M22, gross margin of 51.2% is lower than the 53.1% in 9M21.

UMS's expansion plans on track

  • Construction of the new Penang factory is on schedule to be completed by the end of the year and UMS is preparing to ramp up production from the middle of 2023.

UMS – Outlook and recommendation

Outlook remains bright in the next few months, supported by order backlog

  • The outlook for UMS in the next few months remains robust with a huge order backlog from its key customer to be produced and delivered, especially for the component segment. UMS has progressively added new machines to its integrated system division.
  • Overall, with the new capacity, UMS has no issue fulfilling the current backlog.

Onboarding new customer; contribution expected to be significant in the next few years.

  • UMS has been actively engaging with potential new customers. The group started its first articles for a potential new customer recently. When fully on board, this customer is expected to contribute significantly to the group’s revenue in the next three to four years’ time.

Order backlog is expected to last a few more months.

  • We expect UMS to report another strong quarter in 4Q22, and likely 1Q23, as the group still has an order backlog, especially for the component segment.
  • Beyond 1H23, growth for the semiconductor industry could slow down, on the back of the growing macro headwinds which could cause a demand weakness, especially for consumer electronics. This could lead to a steeper cut in capital expenditure (capex) going forward.
  • According to Gartner, semiconductor capex spending is expected to dip 10.1% y-o-y in 2023 and resume growth in 2025.

Expect contribution from new customer to fill the gap during the modest growth phase

  • Beyond 1H23, we can expect contribution from UMS’s new customer – which is in the similar space as its existing key customer – to kick in. Contribution for FY23F could still be low but this should gradually increase as the group goes into mass production. We expect this customer to contribute significantly to the group in three to four years’ time.

Raised earnings forecast for UMS by 14% to 25%; upgrade to BUY

  • We have assumed a tax rate of 12% going forward, similar to the current tax rate. We have also factored in contribution from the potential new customer from 2H23 onwards. As such, FY22F/23F/24F earnings forecast for UMS were raised by 14%/24%/25%.
  • On the back of the higher earnings, our target price for UMS is revised up to S$1.42, (previously S$1.14) still pegged to 9x P/E, ~-1 standard deviation of the 5-year average P/E, on FY23F earnings.
  • Given the still strong order momentum with contribution from the new customer, we upgrade UMS to BUY.

Beneficiary of trade diversification.

  • The China-US trade tension was worsened by the recent export ban by the US for exports to China. With its main production facilities in Malaysia, UMS is a key beneficiary of the trade diversification.

Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @

Lee Keng LING DBS Group Research | 2022-11-15

Previous report by DBS:
2022-10-14 UMS - Healthy Orderbook But Macro Headwinds Too Strong.

Price targets by 3 other brokers at UMS Target Prices.
Listing of research reports at UMS Analyst Reports.

Relevant links:
UMS Share Price History,
UMS Announcements,
UMS Dividends & Corporate Actions,
UMS News Articles

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