Brokers' take: CGS-CIMB reiterates 'add' on UMS, raises its target price to S$1.53

Published Fri, Mar 26, 2021 · 01:04 PM

CGS-CIMB has raised its target price on UMS Holdings to S$1.53 from S$1.31 previously, while reiterating its "add" call.

This comes after Semiconductor Materials and Equipment International (SEMI) projected a spending forecast of US$80 billion for semiconductor equipment in its quarterly World Fab Forecast report released in March. The report also noted three consecutive years of record highs in fab equipment spending by the industry, driven by the pandemic-induced demand for electronic devices.

In CGS-CIMB's Thursday report, the brokerage named UMS as an indirect beneficiary, as the "strong projected spending by SEMI will benefit Applied Materials (AMAT), which is the leader in materials engineering solutions used to produce virtually every new chip".

"As AMAT is a major customer of UMS, this will in turn support our earning expectations for UMS in FY21-23," said CGS-CIMB analyst William Tng.

Given current chip shortages and aggressive capacity expansion plans by semiconductor companies, the brokerage noted that their current Gordon growth valuation method may be invalidated. Mr Tng says this is because the share price may retest the high price to book value (P/B) of 2.893 times achieved in the FY16-19 upcycle market.

Instead, CGS-CIMB switches its target FY21 P/B to the peak achieved previously in the FY16-18 upcycle. This means the brokerage's FY21 target for the stock is to trade at 2.893 times its book value, up from its previous P/B of 2.46 times, leading to a higher target price of S$1.53.

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Re-rating catalysts highlighted are stronger-than-expected recovery for the semiconductor industry, as well as better-than-expected performance at its associate. On the other hand, downside risks include disruption to the supply chain if the Covid-19 pandemic worsens, and a higher-than-expected tax rate due to expiry of pioneer tax status for a Malaysian subsidiary.

As at the midday break on Friday, UMS shares were trading S$0.02 or 1.6 per cent higher at S$1.28.

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