UMS Holdings - UOB Kay Hian 2022-11-14: 9M22 Above Expectations; Benefited From Robust Expansion Of Global Wafer Fabs

• UMS's 9M22 earnings of S$82m (+73% y-o-y) are above our expectations, forming 104% of our 2022F estimate as UMS continues to benefit from solid expansion of wafer fabs worldwide.
• UMS's order outlook for the next six months remains strong with its huge order backlog and it is ready to take on more orders from new customers.
• We raised our 2022 and 2023 EPS by 27% and 29%. Upgrade UMS to BUY with a 29% higher target price of S$1.38.

UMS's 9M22 earnings benefited from strong expansion of global wafer fabs.

• UMS Holdings (SGX:558)’s 9M22 earnings of S$82m (+73% y-o-y) are above our expectations, forming 104% of our full-year estimate as UMS continues to benefit from the strong performances of its Semiconductor Integrated System and component sales.
• Robust revenue growth across all sectors. See UMS's announcement dated 11 Nov 2022. For 9M22, semiconductor sales increased 45%, while aerospace revenue grew 79%. Sales in the “others” category jumped by 70% to S$15m. Semiconductor Integrated System sales grew 45% to S$107m. Component sales also shot up 44% to S$132m.
• 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 124% and revenue in the “others” market soared 147% in 9M22. Sales in Singapore went up by 48%, while revenue in Taiwan and the US increased by 28% and 12% respectively.

UMS’s outlook remains robust with a huge order backlog and it is ready to take on more orders from new customers.

• The slightly lower forecast given by UMS’s key customer recently is unlikely to have a significant impact on UMS's performance given the huge order backlog from its key customer.
• According to SEMI, semiconductor manufacturers worldwide are forecasted to expand 300mm fab capacity at a nearly 10% compound average growth rate from 2022 to 2025, hitting an all-time high of 9.2m wafers per month.
• Also, Mckinsey predicts that the semiconductor market will surpass US$1t by 2030, led by autos and data centres.

UMS's expansion plans are progressing well.

• Construction of the new Penang factory is on schedule for completion by the end of the year and UMS is preparing to ramp up production from the middle of 2023. UMS will continue active engagement with prospective customers.
• 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 labour situation in Malaysia has improved and UMS recently hired more foreign workers to help alleviate the manpower crunch in Penang. UMS will carry on with its plans to recruit more local and foreign workers in the coming months.
• The aerospace industry is also looking up. While current recovery is still impacted by issues such as manpower crunch, supply chain, geopolitical problems and pandemic curbs in some markets, global leaders such as Boeing are forecasting a market value of US$7.2t for new airplane deliveries, with the global fleet increasing by 80% through 2041 compared to pre-pandemic levels in 2019.

UMS – Earnings forecast revision & recommendation

• We raise our 2022/23/24 earnings estimates for UMS by 27%/29%/36%, after raising our revenue forecasts by 3%/12%/17% to account for the stronger-than-expected 9M22 results and strong order backlog of UMS’s key customer.
• Also, we reduced our tax rate assumption to 0.1%/10.0%/10.0%, down from 17.0%/22.2%/22.2%, to account for the extension of pioneer tax incentives granted by the Malaysia government. 2022’s tax rate is exceptionally low because of the reversal of tax provision after the resolution of the pioneer tax incentives with the Malaysian government.
• Upgrade UMS to BUY with a 29% higher target price of S$1.38 (from S$1.07), based on an unchanged PE-based valuation of 8.5x 2023F EPS. This is pegged to -1 standard deviation of the historical mean P/E.
• Catalysts to UMS's Share Price:
  • Higher-than-expected factory utilisation rates.
  • Return of orders for aircraft components to benefit recently-acquired subsidiary JEP Holdings.
  • Better-than-expected cost management.