Brokers’ take: Analysts upgrade UMS to ‘buy’ on Q3 earnings beat

MAYBANK Securities and UOB Kay Hian (UOBKH) have upgraded UMS Holdings to "buy" from "hold", while raising their price targets on the semiconductor manufacturer after its Q3 FY2022 earnings exceeded their expectations.

Maybank's upgrade was based on UMS' "robust" outlook as the company has largely secured its key orders for the next six months, said analyst Jarick Seet on Monday (Nov 14).

Its higher target price of S$1.34 compared to S$1.20 previously accounts for upward revisions to profit after taxes and minority interests (Patmi) estimates, which have been raised by 13.4 per cent and 13.8 per cent for FY2022 and FY2023, respectively.

UMS' revenue and Patmi for Q3 were driven by strong integrated system sales to exceed Maybank's forecasts. Its nine-month 2022 Patmi came in at 88 per cent of the research house's projected revenue for FY2022. 

The new target price is however pegged to a lower price-to-earnings ratio (P/E) forecast of eight times - compared with 8.5 times previously - as Seet opts to be "conservative due to a challenging macro sector outlook". 

Nonetheless, the analyst believes that UMS' H1 FY2023 will be "more secure" despite the challenges in the semiconductor space. The manufacturer's order book for the next six months has been largely secured, as it has a sizeable order backlog from a key customer which generates more than 80 per cent of its revenue.

UMS' expansion plans are also on track, noted Seet. In addition to ramping up production in 2023 once its new factory in Penang is complete, the manufacturer is in talks with a potential new customer that might absorb the cost of the plant.

"If successful, this would help UMS diversify away from its single largest customer," said Seet.

He added that the company's valuation remains attractive at a P/E of 6.4 times the projections for FY2023.

Likewise, UOBKH raised its price target to S$1.38 from S$1.07 after lifting FY2022 to FY2024 estimates by 27 per cent to 36 per cent to account for UMS' stronger-than-expected results and a strong order backlog. Noting an "exceptionally low" tax rate for 2022, the brokerage has also reduced its tax rate assumption to account for the extension of pioneer tax incentives granted by Malaysia's government.

The revised target remains based on an unchanged 8.5 times FY2023 earnings per share estimate, which is one standard deviation point below the stock's mean P/E.

UOBKH analyst John Cheong highlighted "bright sparks" in Malaysia's landscape with the recent easing of the country's employment policies, which would allow UMS to carry on with its plans to recruit more workers in the coming months.

"The labour situation in Malaysia has improved and UMS recently hired more foreign workers to help alleviate the manpower crunch in Penang," observed Cheong in a separate report on Monday.

In his view, the group's expansion plans are also progressing well, considering UMS' plans to ramp up production in mid-2023 with the construction of its new Penang factory on schedule for completion by end-2022.

Based on the group's strong order outlook for the next six months and its order backlog, the analyst believes UMS is ready to take on more orders from new customers.

"The slightly lower forecast given by UMS' key customer recently is unlikely to have a significant impact on UMS' performance given the huge order backlog from its key customer," he added.

Shares of UMS were trading 6.5 per cent or S$0.07 higher at S$1.14 as at 3.05 pm on Monday.

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