Maybank and UOB Kay Hian downgrade UMS Holdings to 'hold' on 'cautious outlooks' from leading chipmakers

Maybank's Jarick Seet still sees the stock as worth holding on to due to its attractive yield of 4.6% for FY2023.

Analysts from Maybank Securities and UOB Kay Hian have downgraded their calls on UMS Holdings to "hold" from "buy" with lowered target prices.

Maybank Securities' Jarick Seet has lowered his target price to $1.33 from $1.47 previously while UOB Kay Hian's John Cheong has lowered his target price to $1.32 from $1.38 previously.

To Seet, the downgrade comes as he expects an “unavoidable” slowdown for UMS. The slowdown is based on Seet’s channel checks as well as the negative outlook released by several key semiconductor players like LAM Research, Samsung and Intel.

In his report dated Feb 6, Seet believes that there may be a slowdown and, or a delay of orders from UMS’s key customer, leading to a weaker 4QFY2022 ended Dec 31, 2022, and 1HFY2023.

The analyst expects UMS to report revenue of $90 million and patmi of $20 million during its results for the 4QFY2022, which are due to be released on Feb 27. Seet’s figures come after lowering his forecasts for the FY2022.

“We also expect 1HFY2023 to be weaker due to the broader sector slowdown and impact of the weakening US dollar (USD) on UMS’s receivables,” Seet writes.

“However, the ramp-up of its new factory and new customer will be instrumental for its financial performance and we see strong potential for a 2HFY2023 recovery,” he adds.

For the FY2023, Seet expects an “attractive” dividend yield of 4.6% from UMS for the FY2022 and FY2023. “UMS has generally rewarded its shareholders attractively in terms of dividends and we expect its dividend to increase as its performance continues to improve… so we think it makes sense to hold the stock during this expected short downturn,” he says.

Despite the weaker short-term outlook, the analyst remains optimistic on UMS’s prospects, saying that its longer-term outlook “remains intact”. This is “especially with the gain of a new large customer which should provide growth over the next few years”.

UOB Kay Hian is 'mindful' of the 'cautious outlooks' from leading chipmakers

To UOB Kay Hian's Cheong, the downgrade comes as leading chipmakers such as Taiwan Semiconductor Manufacturing Company Limited (TSMC), Intel, Qualcomm and Samsung are seeing more "cautious outlooks" in their latest results. They believe that the demand for semiconductors will be weak in 1H2023, Cheong adds.

In their latest results, of which most were released since the beginning of 2023, TSMC said that it expects its chip sales to slow in the March quarter, projecting a revenue decrease of 3% y-o-y and 14% q-o-q. Meanwhile, Intel's earnings for the 4QFY2022 fell 32% y-o-y. The group projected a revenue decline of 40% q-o-q for the 1QFY2023 due to the dismal personal computer (PC) and data-centre markets.

Qualcomm guided its revenue to decline by 4% q-o-q due to mobile phone demand remaining weak and the elevated levels of inventory sustaining for 1HFY2023. Samsung also warned that its latest quarterly profit would fall by 66% as the weakening global economy has affected memory chip prices and reduced demand for electronic devices.

Should the chipmakers cut or delay their capital expenditure (capex), UMS's revenue could weaken in the near-term, warns Cheong.

The group's major customer, Applied Materials, has a "more downbeat" outlook overall for FY2023 as it expects to see a pull-back in demand for wafer front-end equipment. This is even though it released a "more neutral" guidance in its results for the 4QFY2022. Applied Materials is expecting to see its revenue for the 1QFY2023 grow by 6% y-o-y but fall by 1% q-o-q.

In Cheong's report dated Feb 7, the analyst points out that the latest wafer fab equipment (WFE) outlook released by Lam Research highlighted that the WFE market is expected to decline by around 20% y-o-y in 2023 to the mid-US$70 billion range. This comes as customers across all segments are exercising caution, especially those in the memory markets. China’s restrictions also pose additional headwinds, Cheong adds.

"On the other hand, SEMI [which offers reports on the semiconductor industry] expects the global total semiconductor manufacturing equipment market to contract 11% to US$91 billion in 2023," says Cheong.

Further to his report, Cheong cautions investors in chasing UMS's share price rally. The counter saw its price increase by around 20% since UOB Kay Hian's upgrade after its 3QFY2022 results in November 2022. Maybank had also issued an upgrade at around the same time.

"In addition, the sale of treasury shares by UMS in Jan 23 also warrants some caution," says Cheong.

The analyst has trimmed his earnings estimate for the FY2023 and FY2024 by 16% and 15% respectively after lowering his revenue forecasts by 11% each for both years. This is to account for the weaker results and the chipmakers' cautious outlooks, he writes.

For the 4QFY2022, Cheong is expecting UMS to report earnings of US$19 million, indicating a 23% growth y-o-y but a decline of 41% q-o-q. This is after adjusting for the one-off tax writeback of $12 million in the 3QFY2022.

Cheong's new target price is based on a higher P/E-based valuation of 9.6x FY2023 earnings per share (EPS), -0.5 standard deviation (s.d.) from the historical mean (up from 8.5x FY2023 EPS, -1 (s.d.) of the historical mean P/E).

"The reason for increasing our P/E peg is to reflect the recent re-rating of US-listed semiconductor equipment makers, where we believe is due to the expectation of slower rate hikes by the Fed," Cheong writes.

As at 2.48pm, shares in UMS are trading 13 cents lower or 10% down at $1.17.

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