• A semiconductor recovery play. UMS Integration offers a play on the recovery in front-end semiconductor sector recovery. We expect the sector to recover this year and towards 2025. Global semiconductor capacity is expected to increase by 6% YoY in 2024 and 7% YoY in 2025 (2023: +5.5% YoY), according to SEMI’s World Fab Forecast report. This makes UMS’ key customer and, in turn, UMS itself key beneficiaries of the semiconductor recovery trend. The stock trades at c.18x FY24F P/E based on Bloomberg estimates, with a c.5.5% dividend yield.

• New customer and Penang facility to drive growth. UMSH recently won a new customer in March, which will account for a higher production volume at its new Malaysia plant. This customer’s strategy is to grow its fabrication (fab) capabilities in Malaysia to mitigate the risk of sanctions being imposed on China, where it has exposure. FY24 revenue guidance for this new customer is positive, and estimated at USD30m. Thereafter, orders from this customer should grow progressively. We expect a ramp-up in orders from the customer from 2H24 onwards. There are also plans for another assembly plant, post its recent equity fundraising exercise, to increase production capacity. This, in turn, should facilitate customers scaling up their orders in the future. We believe it will target more complex, medium- and large-format components to boost customer stickiness.

• Semiconductor equipment sector expected to grow into 2025. According to Semiconductor Equipment and Materials International (SEMI), global sales of total semiconductor manufacturing equipment by original equipment manufacturers (OEMs) are forecasted to reach a record USD109bn in 2024. This is expected to continue into 2025, reaching USD128bn (+17% YoY) – driven by both front- and back-end segments. We see a gradual recovery in 2024 before a more pronounced rebound takes place in 2025. Longer-term semiconductor equipment demand should be driven by ongoing technological and innovations in artificial intelligence (AI) applications, data centres, high-performance computing, and automotive electrification.

• Results highlights. 2Q24 earnings declined 25%YoY (+4% QoQ) to SGD9.5m on the back of SGD56m in revenue (-25% YoY, +4% QoQ). The revenue decline was led by the semiconductor segment (SGD46m, -29% YoY, +1% QoQ), offset by the aerospace segment (SGD6m, +5% YoY, +24% QoQ). GPM expanded to 53.5% (+7.2ppt YoY, +0.2ppt QoQ) due to a higher-margin component sales mix. 2Q24 showed a sequential improvement in its core business segments, which are on track for a chip sector rebound from 2025.

• Key downside risks include a later-than-expected demand recovery, which will pose downside risks to our earnings recovery thesis.

Source: RHB Securities Research - 5 Nov 2024