RHB Bank Singapore analyst Alfie Yeo notes that UMS Holdings 558 offers a play on the recovery in front-end semiconductor sector recovery in an unrated Nov 4 report.
“We expect the sector to recover this year and towards 2025,” Yeo writes. “Global semiconductor capacity is expected to increase by 6% y-o-y in 2024 and 7% y-o-y in 2025, according to Semiconductor Equipment and Materials International’s (SEMI) world fabrication (fab) forecast report. This makes UMS’s key customer and, in turn, UMS itself key beneficiaries of the semiconductor recovery trend.”
SEMI’s forecast report notes that global sales of total semiconductor manufacturing equipment by original equipment manufacturers (OEMs) are expected to reach a record US$109 billion ($143.8 billion) in 2024. This is expected to continue into 2025, reaching US$128 billion driven by both the front and back-end segments.
Currently, UMS stock trades at around 18 times FY2024 price-to-equity ratio (P/E) based on Bloomberg estimates, with an around 5.5% dividend yield.
The group has also recently won a new customer in March, which will account for a higher production volume at its new Malaysia plant.
Yeo notes that the customer’s strategy is to grow its fab capabilities in Malaysia to mitigate the risk of sanctions being imposed on China, where it has exposure. FY2024 revenue guidance for this new customer is positive, and estimated at US$30 million. Following this, orders from this customer should grow progressively.
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“We expect a ramp-up in orders from the customer from 2HFY2024 onwards. There are also plans for another assembly plant, post its recent equity fundraising exercise, to increase production capacity. This, in turn, should facilitate customers scaling up their orders in the future. We believe it will target more complex, medium- and large-format components to boost customer stickiness,” notes Yeo.
Meanwhile, UMS’s 2QFY2024 earnings declined 25% y-o-y to $9.5 million on the back of $56 million in revenue, which was 25% lower y-o-y. The revenue decline was led by the group’s semiconductor segment, offset by its aerospace segment.
Gross profit margin (GPM) expanded 7.2 percentage points (ppts) y-o-y to 53.5% due to a higher-margin component sales mix. Notably, 2QFY2024 showed a sequential improvement in UMS’s core business segments, which Yeo notes are on track for a chip sector rebound from FY2025.
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Overall, the analyst sees a gradual recovery in 2024 before a more pronounced rebound takes place in 2025.
He adds: “Longer-term semiconductor equipment demand should be driven by ongoing technological and innovations in artificial intelligence (AI) applications, data centres, high-performance computing, and automotive electrification.”
Key downside risks noted by Yeo include a later-than-expected demand recovery, which will pose downside risks to his earnings recovery thesis.
As at 11.51 am, shares in UMS are trading flat at $1.01.
