“Customer Applied Materials (AMAT) estimates 2020 wafer fabrication equipment (WFE) spending was in the high-US$50 billion ($66.5 billion) range, and expects 2021 WFE to be slightly above US$70 billion. Furthermore, AMAT expects to outperform peers in 2021 on the back of robust fundamentals in favour of DRAM investment upswing,” writes the Maybank KE analyst in a March 1 report.
In addition to WFE, Applied Materials is also involved in emerging technologies such as data centre capex, automotive chip shortages and post-pandemic accelerated digital transformation. Lih therefore sees UMS enjoying a 19% upside potential to his FY2021 growth estimate for the firm despite recent headwinds.
Lih blames the disappointing 4QFY2020 results for UMS on slower-than-expected revenue momentum and forex losses, which amounted to $1.8 million in 4QFY2020 out of $2.1 million in the financial year. UMS incurred goodwill impairment of $1.1 million and a $5.9 million impairment stemming from its associate, JEP Holdings, of which UMS owns 40.69%. It also bore a $2.5 million share of JEP’s goodwill impairment. DBS Group Research analyst Ling Lee Keng says that net profit without impairment would have come in at $46 million - a 37% y-o-y surge from FY2019.
These impairments are seen to be one-off drags on net profit. Lih sees the JEP impairment measures as a prudent move given the present weak aerospace conditions, with these seen to be written back following long-term aerospace recovery. It was for this reason too that UMS declared a lower 4QFY2020 dividend of just 1 cent vis-a-vis the 2 cent final dividend in 4QFY2019 in addition to a special dividend of 0.5 cents.
Nevertheless, UMS continues to be relatively strong in terms of its balance sheet. Tng points out that the firm has net cash holdings of $38 million.
“Excluding these exceptional items, core net profit was $45.6 million (+36% y-o-y). FY20 core net profit was in line at 95% of our full-year forecast,” remarks Tng in a Feb 26 report. Revenue, notes Lih, also grew 9% y-o-y due to growing semiconductor equipment demand globally.
Management expects a robust year for semiconductors in FY2021, with global chip sales seen to grow 8.4% y-o-y in 2021 to US$469 billion according to the World Semiconductor Trade Statistics. The Semiconductor Equipment and Materials International forecast sees global sales reaching US$68.9 billion for 2020 before growing 4.4% to US$71.9 billion, followed by 5.8% y-o-y to US$76.9 billion in 2022.
"UMS Holdings is in a sweet spot to ride on strong global chip demand, on the back of the acceleration of 5G, artificial intelligence (AI) and other technology-driven developments," notes Ling of DBS. He has issued a "buy" call on the stock too at a target price of $1.57, pegged to a peak valuation of 17 times FY2021 P/E due to this strong industry outlook.
A bullish Tng has therefore gone so far to raise target price to $1.31 from $1.27. Still, he cut FY2021-2022 earnings per share (EPS) predictions by 7.4%-7.5% to account for headwinds facing JEP and potentially higher tax rates due to the expiration of pioneer tax status for a Malaysian subsidiary in FY2021, with a higher-than-expected tax potentially a downside. Tng has also pared back FY2021-2023 dividend assumptions to 3.5 cents per annum.
“The impairment does not affect our thesis that UMS is a proxy to the ongoing semi equipment upswing. Hence, we see the current sell-off as an opportunity to ‘buy’ the dip,” says Lih of Maybank KE.
As of 3.36pm, UMS is trading 1.74% down at $1.13. P/E ratio is 13.58 and dividend yield 3.98%.
