“Despite the ongoing trade war between the weighing on global sentiment, UMS's key customers' order forecasts have not changed,” writes UOB Kay Hian’s John Cheong in his May 14 note, where he kept his “buy” call.
“UMS is encouraged by the strong order flow from its new key customer as it seeks to divert its US supply source to Asia. While US trade tariffs and export controls continue to disrupt
global markets, the semiconductor industry remains tariff-exempt for now,” adds Cheong, who figures the stock is now worth $1.32, up from $1.21.
For the three months ended March 31, the capital equipment company reported revenue of earnings of $57.7 million, up 7% y-o-y. However, earnings in the same period held steady at just over $9.8 million, as the bottom line was chipped away by higher costs and unfavourable forex.
While UMS reported lower sales across the board in the quarter, revenue in Malaysia and the US bucked the trend. For example, US revenue was up 7% y-o-y and Malaysia’s jumped 287% y-o-y as USM ramps up the production of components for its new major customer in the semiconductor space.
See also: SAC Capital initiates ‘buy’ on Sanli Environmental after $105.3 mil contract win from PUB
Citing SEMI, the industry association, Cheong says that global fab equipment spending for front-end facilities this year is seen to increase by 2% y-o-y to US$110 billion ($142.7 billion).
Besides semiconductors, UMS, via is subsidiary JEP Holdings, is seen to enjoy some support from the steady growth of the aviation industry. According to the International Air Transport Association, the number of air travellers around the world to surpass five billion whilst total industry revenue is set to exceed US$1 trillion for the first time in 2025.
However, to account for the weaker US dollar against the ringgit and the Singdollar, Cheong has trimmed his gross margin assumptions for FY2025 by 0.5 percentage points, and similarly so for FY2026 and FY2027, resulting in corresponding lower earnings forecasts of 3%, 4% and 4% respectively.
See also: CGSI downgrades Grab to ‘hold’ ahead of 2QFY2025 results, expects consumer spend to slow in 2H2025
“To recap, the majority of UMS’ revenue is denominated in US dollar, while it incurs local operating costs in Malaysia and Singapore. However, UMS has a natural hedge of 30% as it procures raw materials in US dollar,” says Cheong.
Nonetheless, Cheong, factoring in the production ramp-up from the new customer, which helps improve the quality of the earnings, he has derived a higher target price of $1.32.
For him, catalysts include higher-than-expected factory utilisation rates, the return of orders for aircraft components to benefit subsidiary JEP Holdings and finally, better-than-expected cost management.
Similarly, Jarick Seet of Maybank Securities expects the contribution from the new customer to increase q-o-q as the ramp-up in production continues to improve. On the other hand, revenue from its existing customer should also grow slightly y-o-y as well. Citing the management, Seet says UMS has a weekly revenue target of $1.5 million by the end of 2025. It is currently at a $600,000 to $650,000 a week run-rate.
“Earnings likely bottomed in FY2024 and should improve in the years ahead, especially as its new major customer is finally commencing production and profitability should start to improve q-o-q,” says Seet, who is now applying 15x blended FY2025 and FY2026 earnings as a valuation multiple instead of 14x, thereby deriving his slightly higher target price of $1.19, from $1.16.
Upside factors noted by him includes stronger-than-expected revenue momentum following capacity expansion in the FY2022 and better-than-expected contributions from subsidiaries Kalf Engineering, Starke and JEP Holdings.
Conversely, downsides include higher-than-expected labour costs, lower-than-expected margins due to negative operating leverage if volume falls and finally, lower-than-expected dividends which may spook yield investors.
For more stories about where money flows, click here for Capital Section
Ling Lee Keng of DBS Group Research is not too concerned about the negative impact of the trade war on UMS. “UMS primarily ships to its customers’ operations in Malaysia and Singapore, adopting a local-for-local model. For direct shipments to the US, which account for approximately 13% of the group’s revenue in 1QFY2025, applicable tariffs are absorbed by the customers.”
Ling has lowered her earnings forecasts for FY2025 and FY2026 by 8% and 5% respectively because of lower margin assumptions. However, she has raised her target price from $1.31 to $1.38 as she rolls forward valuation to blended FY2025 and FY2026 earnings, and applying an 18.8x P/E multiple, 1SD above the four-year average.
One key risk noted by Ling is the consequence of disruptions to UMS’ relationship with Applied Materials, or any weakness in the latter’s end-demand, which could significantly weigh on the group’s performance.
