Maybank Research analyst Jarick Seet has maintained his &ldquo hold&rdquo call on &ldquo fairly valued&rdquo UMS Holdings 558 -0.89% , although he has increased his target price to $1.16, up from 94 cents previously.

 

In his report dated Aug 15, Seet notes that UMS reported a weak 1HFY2023 ended June, with a patmi of $29 million that came in below estimates. He expects the company&rsquo s 2HFY2023 to remain &ldquo equally weak&rdquo , as orders are not expected to ramp up from key customers in 2023.

 

Seet believes UMS&rsquo 2HFY2023 is likely to be similar to its first half performance, during which revenue dropped by 9% y-o-y to $155.1 million and patmi declined 27% y-o-y to $29 million. This came as a result of weaker gross margins which edged down to 46.3% from 51.7% in 2QFY2022, mainly due to the weaker US Dollar and lower machine utilisation rates.

 

More positively for shareholders, UMS announced dividends for 2QFY2023 that increased by 20% to 1.2 cents per share from 1.0 cent in the previous quarter.

 

Seet explains that UMS now has greater certainty on its longer-term prospects after renewing an Integrated System contract with an existing key customer to end-2025. UMS also received an in-principle agreement with a new customer for a three-year contract with a renewal option, and expects a $30 million contribution from the new customer in 2024 before it becomes a $300 million per annum top-line contributor in the next three to five years, he adds.

 

&ldquo We remain optimistic that its longer-term prospects are unchanged, especially as it has gained a new large customer, which should provide growth in the next few years,&rdquo says the analyst, who has lowered his FY2023 patmi forecast by 10.2% while increasing his FY2024 forecast by 17.2%.

 

&ldquo However, we believe the share price has fully priced in any near-term upside unless orders ramp up in FY2024,&rdquo adds Seet. &ldquo We prefer Frencken as better quarters lie ahead for it, in our view.&rdquo

 

His higher target price of $1.16 for UMS is based on a 9x FY2024 price-to-earnings ratio (P/E).

 

Upside risks to his valuation include stronger revenue momentum following capacity expansion in FY2022, improved contributions from subsidiaries Kalf Engineering, Starke and JEP, and better cost controls.

 

On the other hand, UMS&rsquo margins would be impacted if the company were to face higher labour costs or difficulty expanding its workforce to cope with strong order momentum, as well as negative operating leverage from falling volumes. Considering UMS has a quarterly dividend policy and a track record of strong cash flow generation, Seet adds that lower-than-expected dividends could &ldquo spook&rdquo yield investors.

 

MAINBOARD-LISTED semiconductor company UMS Holdings : 558 -1.9% reported a 42.4 per cent fall in net profit to S$11.6 million for the three months ended Jun 30, 2023, from S$20.2 million over the same period a year earlier.

 

Revenue fell 14.1 per cent to S$74.4 million over the same period, from S$86.6 million a year earlier.

 

In its bourse filing on Monday (Aug 14), the company attributed the fall in revenue to weaker performances of both its semiconductor and &ldquo others&rdquo business segments, while its aerospace segment saw improved sales.

 

Its &ldquo others&rdquo business segment includes the manufacture of water disinfection systems, trading of non-ferrous metal alloys and cutting tools.

 

In particular, its semiconductor segment saw revenue fall 14.3 per cent for the quarter year-on-year (y-o-y) to S$64.8 million.

 

&ldquo The decline in semiconductor revenue was due to a 29 per cent drop in component sales, from S$43.6 million in Q2 FY2022 to S$31.0 million in Q2 FY2023, caused mainly by the weaker demand from backend semiconductor customers,&rdquo the company said.

 

For the half-year ended Jun 31, 2023, UMS saw net profit decline 26.7 per cent to S$29 million y-o-y as revenue declined 9.5 per cent to S$155.1 million.

 

UMS chairman and chief executive Andy Luong said that while near term conditions for the semiconductor industry may remain cloudy, he expects the industry&rsquo s mid to longer-term prospects to brighten.

 

&ldquo Moving into the third quarter of 2023, there are signs that demand may stabilise. Our key customer has shared (that) it expects to outperform its markets this year and we are delighted that we have successfully renewed our integrated system contract until end-2025,&rdquo he said.

 

&ldquo Our strong financial standing and new Penang facilities will also position the group to take on new orders from potential new customers which are expanding in South-east Asia,&rdquo Luong added, noting that several semiconductor equipment makers have announced multi-billion-dollar expansion plans in Singapore and the region.