(BUY, SGD0.52, TP: SGD0.71)
We believe Applied Materials (AMAT)’s acquisition of Tokyo Electron Ltd (TEL) will make it a dominant industry player, which will in turn benefit its suppliers. While we do not expect UMS to immediately gain from this, we see it as the sole Singapore proxy to ride on this landscape-changing event. Maintain BUY, with our DCF-based TP unchanged at SGD0.71 (WACC: 10.9%, terminal growth: 0%).
Largest customer makes major move. UMS’ largest customer AMAT, which contributes close to 90% of the group’s revenue, has made a major move by acquiring its rival, TEL. Gartners ranks AMAT and TEL No.1 and No.3 respectively in the semiconductor manufacturing equipment industry in terms of worldwide market share last year. The combined entity could potentially boast a market share of 25.5%, twice as much as that held by AMAT’s second largest competitor, ASML. The deal is expected to wrap up in the middle or second half of 2014, subject to regulatory approvals.
Boosting demand for UMS’ components. The deal will enlarge AMAT’s customer base, drive product innovation and give rise to cost saving opportunities, thus helping it to achieve its ambitious profit growth target. This is likely to benefit UMS in view of the duo’s co-relation in terms of financial performance. We expect this to boost demand for UMS’ components as: i) overall demand for AMAT products will naturally increase, and ii) UMS has cost advantage over Japanese component suppliers.
Endura likely to stay relevant. One concern is whether UMS’ assembly of AMAT’s Endura system would be disrupted in view of the potential overlapping in AMAT and TEL’s product lines. We view this as unlikely since TEL’s CEO Tetsuro Higashi has said that there is limited overlapping in both companies’ products. Secondly, while both companies have their respective wafer deposition products – eg TEL’s Triase+ vs AMAT’s Endurasystem – a key competency of AMAT is its wafer handling platform, which is also UMS’ sole product line. As such, it is likely that UMS’ wafer handling platform will be refined and kept in AMAT’s future product innovations.
Publish date: 27/09/13