UMS Holdings (UMS), the homegrown integrated original equipment manufacturer (OEM) for front-end semiconductor equipment, is optimistic about its long-term outlook.
This follows a challenging year due to the bottoming out of the semiconductor industry after a downturn.
While UMS’s fortunes remain closely tied to the cyclical semiconductor industry, the company is also exposed to a different market — the aerospace industry — via its separately listed subsidiary, JEP Holdings. This reduces business volatility given how the two markets are independent of each other.
JEP, which is 78% owned by UMS, provides precision machine services for the aviation, electronics and automobile industries. The company also sells water disinfection systems and trades non-ferrous metal alloys, machines and customised cutting tools under the “others” segment. In 3QFY2023 ended Sept 30, 2023, UMS’s revenue continued to show signs of stabilisation, falling 29% y-o-y but only declining 4% q-o-q despite global demand for semiconductors remaining soft at the time.
In contrast, the company’s aerospace segment saw a 41% y-o-y increase in revenue, thanks to the recovery in global aviation.
Earnings fell 64% y-o-y to $15.3 million due to softer demand from the semiconductor segment although they grew by 32% q-o-q. UMS benefited from improved material margins, which grew to 51.2% in 3QFY2023 from 50.5% in 3QFY2022, mainly due to higher US dollar/Singapore dollar exchange rates and better margins from the renewal of its integrated system contract with its key customer.
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For 3QFY2023, UMS declared an interim dividend of 1.2 cents, same as the preceding 2QFY2023 but 20% higher y-o-y over 3QFY2022’s one cent.
In his Nov 15, 2023, report, UOB Kay Hian analyst John Cheong notes that the company’s earnings stood largely in line with its expectations and “UMS 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”.
Furthermore, he notes that UMS has also secured an in-principle agreement with its new customer for a renewable three-year contract. “This new customer contract win will boost UMS’s buoyant outlook as its new Penang facilities will be ready for volume production by September. The production ramp-up will enable it to take on new orders from its new customer which is estimated to reach at least US$30 million next year,” writes Cheong.
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Indeed, demand for semiconductors is expected to stage a comeback this year, with Semiconductor Equipment and Materials International (SEMI) pointing to an expected rebound FY2024 through FY2026 rebound, driven by the rise in demand for wafer and silicon-hungry artificial intelligence (AI), high-performance computing (HPC), 5G, automotive and industrial applications.
SEMI also predicts fabrication equipment spending this year to recover by 15% over 2023 to US$97 billion ($130 billion). In a separate report on Feb 5, the Semiconductor Industry Association projects the market to grow 13% this year to nearly US$600 billion.
Meanwhile, the recovery is already seen here in Singapore. According to the Singapore Economic Development Board on Jan 26, total manufacturing output for December was down 2.5% y-o-y but electronics countered the trend with an increase of 6.3%. The semiconductor segment within electronics, meanwhile, shot up by 17.7%, led by improved demand in selected end markets such as smartphones.
CGS-CIMB Research’s analyst William Tng affirms the bullish view, writing in his Dec 6, 2023, sector note: “Suppliers supporting the semiconductor industry would continue to benefit from trade diversion into Malaysia, given the ongoing US-China geopolitical tension.”
Another hopeful indication of UMS’s year ahead can be seen from the expectations of its key client, leading global semiconductor equipment manufacturer, US-listed Applied Materials (AMAT), whose overall output from Singapore accounts for around 50% of its global semiconductor equipment. For its 1QFY2024 ended Jan 31, AMAT expects net sales of around US$6.47 billion, plus or minus US$400 million, which will be within the range of 1QFY2023’s US$6.74 billion and higher than 1QFY2022’s US$6.27 billion.
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Placement to fund expansion
In its most recent and clearest sign of the company’s growth ambitions, UMS raised $51.6 million to help fund new capex to meet growing order volume. The offer of 40 million shares at $1.29 was more than 2.5 times subscribed.
“The strong response to the group’s placement underscores our attractive valuation and investors’ confidence in our growth strategy and bright prospects. The placement will position us well to capture the myriad of new opportunities in both the semiconductor and aerospace sectors,” says chairman and CEO Andy Luong, who left Vietnam back in 1978 as a 17-year-old.
He sees semiconductor growth to be driven by the surge in AI demand and robust EV growth in the region, especially as countries increasingly adopt greener options to reach their carbon reduction targets. In addition, Luong believes he is well-placed to capitalise on the post-Covid aviation boom as air travel is enjoying a sharp rebound worldwide.”
In its Jan 26 note, DBS Group Research points out that the quantum raised is larger than UMS’s existing cash balance of just over $30 million. “This could imply that the group is positive on the semiconductor outlook and looking towards larger capex investments.”
Specifically, DBS believes the new funding raised is to go towards buying new machinery for the expanded space at Penang. New orders from a new customer in the memory space are seen to grow from less than $50 million a year now to around $300 million over the next two to three years. This will be a sharp reversal for the memory segment, which was hit with an overall 40% revenue drop in 2023 for the global market, to be followed by growth of more than 50% this year, estimates DBS.
Concurrently, UMS’s key customer in the equipment manufacturing space, believed to be AMAT, is seen to be doing well too. “Equipment makers generally excel during upcycles, based on the trend seen in the past three up-cycles. Furthermore, technology stocks tend to outperform during Fed rate pause,” says DBS, which has maintained its “buy” call and $1.55 target price for the stock.
According to Bloomberg data, as at Feb 1, there are four active calls on UMS, with all rating the stock a “buy”. UOB Kay Hian’s Cheong is the most bullish with a target price of $1.56 while Maybank Investment’s Jarick Seet roundsmup the lower end at $1.49, upgraded on Feb 5 from $1.44 previously.
