December 5, 2019

UMS’ revenue growth ebbs and flows with the semiconductor spending cycle, as AMAT, a wafer front end (WFE) market leader, accounts for 90% of its revenue. Logic/ foundry strength is underpinned by migration to newer nodes and China spending for trailing nodes. In a bull scenario, we see fair value of SGD1.31 – which may pan out if subsiding trade tensions spur stronger than expected investments. In the bear case, we see fair value of SGD0.96 – which may happen if memory investments take longer to recover. AMAT claims to already seeing early signs of NAND investment recovery.

UMS is a strategic outsource partner to AMAT, having been a supplier since 1999. In turn, AMAT boasts entrenched relationships with marketleading chipmakers. Intensity for deposition and etch investments (AMAT’s forte) is expected to increase with new technology nodes as patterning complexity continues to increase. Deposition and etch are also crucial in scaling 3D chips.

We are optimistic on JEP’s prospects (39%-owned associate), as the precision machining specialist enjoys tailwinds as aerospace OEMs i) structurally increase outsourcing; and ii) strategically diversify away from sourcing from China due to the US-China trade war. FY19-21E dividend yields of 4% are supported by FCF and pay-outs take place quarterly.

UMS is a beneficiary of the WFE spending uptick through key customer Applied Materials (AMAT US, Not Rated). We project FY19-21E earnings CAGR of 28% driven by AMAT’s expectations of sustained spending in logic/ foundry, and a recovery of memory spending led by NAND, followed by DRAM. Longer-term prospects are supported by: i) sticky relationship with AMAT; and ii) diversification into other markets. Initiate BUY with ROE-g/COE-g Target Price of SGD1.13, based on 2.2x FY20E P/B. – Maybank Kim Eng

Closing Price: SGD0.99