Broker's take: KGI upgrades UMS to 'neutral' on likely outperformance

KGI Securities on Wednesday upgraded its call on precision engineering firm UMS Holdings, which manufactures high-precision front-end semiconductor components, to "neutral" from "underperform".

In a research note, analyst Kenny Tan increased his estimates of UMS's FY20 sales to S$148 million, up from S$135 million in his previous forecast. This was after he bumped up revenue estimates from the semiconductor segment while reducing contribution from the other businesses.

He also raised the price-to-earnings peg for the stock to 12 times, leading to a higher target price of S$0.89, from S$0.74 previously.

The mainboard-listed counter was trading at 96 Singapore cents as at 2.04pm on Wednesday, down 1.5 cents or 1.5 per cent.

KGI increased the estimates to match an "imminent" upswing in growth for UMS's key customer Nasdaq-listed chipmaker Applied Materials, which just saw its second-highest backlog for its semi systems segment.

"Given the order pushbacks that have occurred, we think good results are in store for UMS," Mr Tan wrote. 

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He noted that the H1 2020 results across semiconductor capital equipment firms had largely been positive, showing year-on-year improvements and beating conservative consensus estimates.

"While market research firms continue to hold mixed sentiments over the development of the semiconductor capital industry in 2020, a good handful of major semiconductor capital equipment players have reported Q2 results, indicating little to no demand fall‐off, and mainly order pushbacks due to supply chain disruptions from Covid‐19 lockdowns," he wrote.

In May, UMS customer Applied Materials reiterated its belief that it will achieve double-digit growth in the semiconductor business this year. Applied Materials estimated then that US$650 million of sales may have been pushed back into later quarters. This amount is about one-quarter of the US$2.57 billion in semiconductor sales the company had achieved in Q2 FY20.

Mr Tan said this aligns with UMS management's acknowledgement of a possible pushback in orders.

He believes UMS will produce quarter-on-quarter outperformance going forward, as its production capacity has returned to "largely normal" levels, which will be "fully utilised to rush out the order backlog".

Near-term catalysts for the stock include any additional positive comments from its management for the second-quarter results, which will likely be released in the second week of August, according to KGI.

Meanwhile, US‐China trade tensions have continued to escalate, with Taiwan Semiconductor Manufacturing Company (TSMC) to stop supplying chips to Chinese tech giant Huawei from September.

"Given TSMC's confidence in filling demand from other customers, we think Applied Materials, and by proxy UMS, should not see order slowdowns from TSMC," Mr Tan said.

However, he warned of the possibility of a "black swan" event in the form of a further escalation in tensions, such as outright restrictions on the ability of US semiconductor capital companies to sell to China.