WHAT HAPPENS in the semicon industry in the near term matters a lot for UMS’ stock price performance, which has been excellent in recent months.
It is a cyclical industry and the easy money has been made by UMS investors, whose stock has soared from 21 cents at the start of June to 46 cents recently.
That’s a 25-cent gain, or 119%, in a matter of 4 months.
Investors attending a presentation on Tuesday (Sept 28) by UMS chief executive officer Andy Luong were looking for guidance on the near term prospects – specifically, when will the semiconductor cycle peak?
He touched on macro and UMS-specific scenarios, including:
* Production ramp-up: UMS targets to ramp up its production by at least 20% in the current 2H, continuing the 20% growth quarter-on-quarter seen in 2Q.
The capacity utilization rate was 65% in 2Q.
* Location, location: UMS, whose manufacturing facilities are in Singapore and Penang, can respond quickly to service requests from the more than 30 semiconductor manufacturing facilities in Singapore, which produces 11% of global output.
* Close proximity to key customer: Since its key customer set up in Singapore, UMS has seen its local sales grow by more than five times on Q-o-Q basis in 1Q10 to $13m.
In 2Q10, sales in Singapore grew by 47.4% Q-o-Q, as its key customer ramped up production in Singapore.
The best is yet to come: This key customer intends to channel more than 50% or $1.4b, of shipments through this centre in the next few years. It also plans to relocate 75% of work outsourced to contract manufacturers to lower cost regions by 2011 – in other words, UMS’ plant in Penang could benefit.
* Semicon boom to continue: There are industry capacity bottlenecks and a packed pipeline of new chip making technologies will drive demand growth for semiconductor equipment up till at least 2011.
The World Fab Forecast report predicts spending in 2011 would increase 18% to US$39b.
“We have lots of work. Q2 of next year is still good, Q3 also,” said Mr Luong.
UMS doesn’t have anything to write off, and no major capex in the coming quarters and coming year. “We invested US$40 million during the downturn, and now it’s payback time.”
With a strong operating cashflow, UMS has surprised by giving a 1-cent dividend during the 1H, and could surprise with another 1-cent payout after its 3Q, according to CIMB analyst William Tng in a report yesterday.
On the possibility of UMS seeking a dual listing, William Tng said that “given the shrinkage of the Singapore tech sector due to privatisation/delisting and Taiwan/Korea being the place where the semiconductor ecosystem is based, it would make sense for UMS to evaluate the merits of any possible dual listing in other countries.”
William wrote: "We maintain our BUY call with S$0.58 target price. At least till end 2H10, earnings momentum should remain strong and dividend surprises should limit downside."
Some highlights of the Q&A session between investors and UMS' Mr Luong and Group Financial Controller Stanley Loh:
Q: What is the percentage of your business comes from Applied Materials?
A: A lot. But it’s ok. If you go to Foxconn and ask how much of their business is from Apple, they will also say ‘A lot’.
Q: Do you see yourself doing ADRs or dual listing?
A: In the US, the relevant fees are expensive. We have not made any announcement yet, but we are looking at all options to enhance the valuation of the company.
This is something we agree: Singapore doesn’t have a focus on tech stocks but the Taiwan and Korea markets understand the cycles. It’s a good business.
Q: What’s the outlook for the semi-con cycle?
A: We have been in this business for over 21 years. You have V-shape and U-shape, we have seen a lot of V-shapes, but things are not the same as they used to be because of new gadgets such as the iPads and smartphones, etc. But we think the cycle is still good for at least three quarters.
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