Ahead of UMS Holdings 558 ’ full year results, UOB Kay Hian (UOBKH) has raised its target price by 19% to $1.85 from $1.65 previously, in anticipation of improving market dynamics in the semiconductor industry.
Analyst John Cheong maintains his “buy” call, and expects UMS to report $16 million in its 4QFY2023 ended Deb 31, 2023 earnings, its first q-o-q earnings recovery since the semiconductor industry went into a downcycle in 1Q2023.
This is on the backing of UMS Holdings’ key customer, Applied Materials (AMAT), reporting its first 1QFY2024 results in Feb. The firm recorded its second consecutive q-o-q revenue growth since it started declining three quarters ago, notes Cheong.
He adds that its operating margin for the segment also increased by 2 percentage points (ppts) q-o-q to 36% from the low in 2QFY2023.
“In its latest outlook statement, AMAT is hearing that the overall market dynamics are improving. There is reacceleration of capital investment by cloud companies, fab utilisation is increasing across all device types and memory inventory levels are normalising. In 2024, AMAT expects to be a leading-edge foundry,” says Cheong.
UMS’s latest outlook statement mentions that it expects its performance in the coming months to be supported by the sanguine guidance of some major semiconductor equipment makers expecting to deliver sustainable outperformance going forward, notes the analyst.
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In addition, UMS most recently completed a new share placement exercise — in which 40 million shares were 2.55 x covered — with global and regional institutional investors. “This has increased UMS’s share base by around 6% to 710.5 million shares,” says Cheong.
It has also secured an in-principle agreement with a new customer for a new renewable three-year contract. As its Penang facilities have been ready for volume production by September 2023, this production ramp-up enables UMS to take on new orders, which is estimated to reach at least US$30 million ($40.40 million) next year.
On the backdrop of a 2024 rebound that will last through till 2026, the Semiconductor Equipment and Materials International (SEMI) expects wafer shipments to set new highs as silicon demand increases to support artificial intelligence (AI), high-performance computing (HPC), 5G, automotive and industrial applications.
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For these reasons, Cheong is positive on the stock. He maintains his financial forecasts but has factored in the earnings per share (EPS) dilution of around 6% from the issuance of 40 million new shares in the recent placement exercise.
The analyst’s target price is based on a P/E valuation of 17 times FY2024 EPS, pegged at 1.5 standard deviation above UMS’s historical mean P/E. “The reason for pegging our P/E-based valuation multiple to above mean is to reflect the improving semiconductor industry outlook and improvement in UMS’s earnings quality from new contributions of its new customer,” he says.
As at 11am, shares in UMS are trading 3 cents higher or 2.08% up at $1.47.
