Brokers’ take: SAC upgrades UMS to ‘buy’ after strong Q1 showing

SAC Capital has upgraded its call on UMS Holdings : 558 0% to “buy” from “hold”, with a higher target price of S$1.55 compared to S$1.39 previously, after the mainboard-listed precision engineering company exceeded its projections for Q1 FY2022.

In a Thursday (May 26) report, analyst Lim Shu Rong said he believes UMS’s stablised gross margin of about 51 per cent can be maintained despite an inflationary environment.

This is because current supply chain dynamics are viewed to work in UMS’s favour, he said, as the company can pass on any cost increases through its list of vendors approved by its client, Applied Materials (AMAT).

With UMS’s contract due for expiry this year, Lim notes that the company’s management is optimistic on the prospects of a renewal.

“To work around supply chain bottlenecks, AMAT is merging system modules onsite at foundries. As such, delivery of systems from UMS’s end is unlikely to stall,” Lim explained.

While the group is expected to incur higher labour costs in the near term amid a tight labour market, the analysts thinks UMS will be able to mitigate these constraints with its ability to capitalise more on its subsidiary JEP’s capacity.

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As such, SAC has raised its FY2022 revenue and net profit estimates for UMS by 24 per cent and 23 per cent, respectively, to account for expected project completions from the group’s subsidiary, Kalf.

In its annual report for FY2021, UMS said discussions are ongoing with Malaysian authorities to relax conditions of the pioneer status incentive after the company’s previous appeal was rejected.

Lim sees further upside to his projections for UMS’s share price should the group be successful in its appeal, as this would allow for the onboarding of new customers. Such an event will significantly reduce reliance on AMAT, in his view.

As at 11.45 am on Thursday, shares of UMS Holdings traded at S$1.15, up S$0.01 or 0.8 per cent.