Executive Summary

UMS Integration (formerly UMS Holdings) is a Singapore-headquartered precision engineering company providing semiconductor equipment manufacturing and engineering services. The company is a critical supplier to Applied Materials (AMAT), the world's largest semiconductor equipment maker, manufacturing precision machined components and integrated systems for front-end wafer fabrication equipment. UMS also operates a growing aerospace segment through subsidiary JEP Holdings and a materials distribution business through Starke Singapore.

Investment Thesis in 3 Sentences: UMS Integration is a well-run precision manufacturer with a sticky customer relationship to Applied Materials, generating consistent FCF through semiconductor cycles. However, the extreme customer concentration (~85% revenue from one customer), cyclical earnings profile, and current premium valuation (29x P/E) at a cyclical trough leave insufficient margin of safety. Wait for a pullback below SGD 0.95 to achieve adequate returns with protection against the significant concentration risk.

Key Metrics Dashboard:

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PHASE 0: OPPORTUNITY IDENTIFICATION (Klarman)

Why Does This Opportunity Exist?

UMS is currently in a semiconductor equipment downcycle. FY2024 revenue declined 19% to SGD 242M from SGD 300M in FY2023, and 35% from the FY2022 peak of SGD 372M. Applied Materials, UMS's key customer, reduced procurement due to inventory buildup and US-China trade restrictions limiting its ability to ship equipment to China.

Potential mispricing sources:

Assessment: The opportunity thesis is weakened by the stock's recovery. UMS traded as low as SGD 0.73 in mid-2024 - that was the time to buy. At SGD 1.35, the market has largely priced in the cyclical recovery and Penang factory ramp-up. The stock has nearly doubled from its trough, suggesting the market is now pricing in significant upside from the new customer diversification and semiconductor upcycle.

If I cannot explain why this is cheap, STOP. At SGD 1.35, this is NOT cheap. The stock trades at 23-29x trailing earnings during a trough year. The market is paying up for the recovery thesis. This warrants caution.

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PHASE 1: RISK ANALYSIS (Inversion Thinking)

"All I want to know is where I'm going to die, so I'll never go there." - Munger

1. Customer Concentration Risk (CRITICAL)

Risk: Applied Materials accounts for approximately 80-85% of semiconductor segment revenue, which itself is 84% of total revenue. This means ~70% of total Group revenue comes from a single customer.

Probability of Adverse Event: 15-20% over 5 years Impact: 40-60% revenue loss if relationship deteriorates materially

UMS has been working to diversify through:

• New customer at Penang Science Park North (commenced volume production March 2024)
• Aerospace segment via JEP Holdings (11% of FY2024 revenue)
• Materials distribution via Starke (5% of revenue)

However, the new customer has not yet been named publicly, and it will take years before diversification meaningfully reduces the AMAT dependency. The RM250M Penang factory investment was specifically built for this new customer, so there is now bilateral dependency.

2. Semiconductor Cyclicality

Risk: Semi equipment spending is highly cyclical. UMS's revenue swung from SGD 164M (2020) to SGD 372M (2022) to SGD 242M (2024) - a 2.3x swing from trough to peak.

Probability: 100% - cyclicality is inherent Impact: 30-50% earnings decline from peak to trough

3. US-China Geopolitical Risk

Risk: US export controls on semiconductor equipment to China directly impact Applied Materials' ability to ship to Chinese customers, which in turn reduces orders to UMS. AMAT reported reduced China shipments in FY2024.

Probability: High and ongoing Impact: 10-20% revenue headwind persists

4. Goodwill Impairment Risk

Risk: The balance sheet carries SGD 86.4M in goodwill (primarily from JEP Holdings and Integrated Manufacturing Technologies acquisitions). This represents 19.5% of total equity.

Probability of impairment: Low (10% near-term) Impact: SGD 86.4M write-down if aerospace or semiconductor business permanently deteriorates

5. Founder/Key-Man Risk

Risk: Andy Luong is Chairman, CEO, and founder. He is 65 years old and holds ~108.9M shares (deemed interest through trusts). The company is heavily dependent on his customer relationships and strategic vision. There is no clear succession plan disclosed.

Probability: Moderate over 5-10 years Impact: Potential loss of key customer relationships

INVERSION SECTION

How could this investment lose 50%+ permanently?

1. Applied Materials shifts production to a competing supplier (perhaps one closer to its own US facilities)
2. US-China tensions escalate, permanently reducing AMAT's TAM and UMS's order flow
3. The new Penang customer relationship fails to scale, leaving UMS with RM250M of underutilized capacity
4. A fundamental technology shift (e.g., radical new manufacturing processes) makes UMS's precision machining capabilities obsolete

What would make me sell immediately (non-price triggers)?

• Applied Materials announces in-sourcing of component manufacturing
• Andy Luong unexpectedly departs without clear succession
• Persistent negative FCF for 2+ quarters
• Loss of pioneer tax status in Malaysia (currently tax-free until ~2028)

Bear case in 3 sentences: UMS is a one-customer company masquerading as a diversified engineering group. When Applied Materials sneezes, UMS catches pneumonia - and AMAT is facing structural headwinds from US-China decoupling that permanently reduce its addressable market. At 23-29x trough earnings with SGD 86M of goodwill on the balance sheet, you are paying a premium for a cyclical business with massive concentration risk.

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PHASE 2: FINANCIAL ANALYSIS

5-Year Financial Summary

ROE Decomposition (DuPont)

5-Year Average ROE: ~18% (distorted by FY2022 peak and FY2024 trough) Normalized ROE (mid-cycle): ~15-17% - This passes the Buffett ROE test, but just barely.

Owner Earnings Calculation

Owner Earnings = Net Income + D&A - Maintenance CapEx - Working Capital Changes

FY2024:
Net Income:          SGD 41.6M
+ Depreciation:      SGD 20.1M
- Maintenance CapEx: SGD 15.0M (estimated at ~60% of total CapEx of SGD 25.9M)
- WC Changes:        SGD 1.3M (net decrease in working capital was a positive)

Owner Earnings ≈ SGD 46.7M (normalized)

On 708M shares = 6.6 cents/share

For mid-cycle normalization, using 5-year average net profit of ~SGD 57.7M:

Normalized Owner Earnings ≈ SGD 63M
Per share: ~8.9 cents

VALUATION TRINITY

1. Liquidation Value (Floor)

Current Assets:                SGD 245.8M
- Total Liabilities:           SGD 65.0M
Net Current Asset Value:       SGD 180.8M
Per share (708M shares):       SGD 0.255

Tangible Book Value:
Total Equity:                  SGD 443.9M
- Goodwill:                    SGD 86.4M
- Intangible Assets:           SGD 1.3M
Tangible Book Value:           SGD 356.2M
- Non-controlling interests:   SGD 25.7M
Tangible BV (attributable):    SGD 330.5M
Per share:                     SGD 0.467

2. DCF / Going Concern Value (Conservative)

Assumptions:

• Normalized Owner Earnings: SGD 63M (5-year average basis)
• Growth Rate: 3-5% (semiconductor equipment growth minus cyclical reversion)
• Discount Rate: 10% (Singapore equity risk premium)
• Terminal Multiple: 12x (reasonable for cyclical industrial with customer concentration)

Conservative Value (10x Owner Earnings): SGD 63M x 10 = SGD 630M
Per share: SGD 0.89

Fair Value (15x Owner Earnings): SGD 63M x 15 = SGD 945M
Per share: SGD 1.33

Optimistic (18x, if diversification succeeds): SGD 63M x 18 = SGD 1,134M
Per share: SGD 1.60

3. Private Market Value

What would a strategic buyer (e.g., a larger contract manufacturer or even Applied Materials itself) pay?

• Recent semiconductor equipment M&A multiples: 12-18x EBITDA
• UMS EBITDA (FY2024): ~SGD 67M
• At 12x EBITDA: SGD 804M = SGD 1.14/share
• At 15x EBITDA: SGD 1,005M = SGD 1.42/share
• Control premium of 20-30% would add SGD 0.23-0.43/share

Private Market Value Range: SGD 1.37 - 1.85/share

4. Graham Number

Graham Number = sqrt(22.5 x EPS x BVPS)
= sqrt(22.5 x 0.0574 x 0.59)
= sqrt(0.762)
= SGD 0.87

MARGIN OF SAFETY CALCULATION

Intrinsic Value Estimate (weighted average): SGD 1.15 - 1.35/share

At SGD 1.35, UMS trades at the upper end of fair value. There is NO margin of safety at the current price.

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PHASE 3: MOAT ANALYSIS

Moat Sources

1. Switching Costs (Moderate)

• UMS has been Applied Materials' manufacturing partner for over 20 years
• Qualification of precision components for semiconductor equipment takes 12-18 months
• Parts must meet extremely tight tolerances (micron-level precision)
• Once qualified, switching suppliers is costly and risky for AMAT
• However, AMAT could develop alternative suppliers if it chose to

Switching Cost Metric: Cost to Switch / Annual Customer Value

• AMAT would need to spend 12-18 months qualifying a new supplier
• Risk of yield loss during transition is high
• But AMAT's bargaining power is immense (they are UMS's entire business)

2. Technical Capability (Narrow)

• Precision machining of complex semiconductor components
• Electromechanical assembly and system integration
• UMS focuses on "critical products which are difficult to fabricate, require very high precision and quality standards, i.e. very high barrier of entry" (FY2024 Annual Report)
• But precision machining is not a unique technology - competitors exist

3. Cost Advantage (Moderate)

• Penang, Malaysia operations benefit from lower costs and pioneer tax status (tax-free)
• Multi-location manufacturing (Singapore, Penang, USA) provides supply chain resilience
• Material margins consistently 50-53%, indicating reasonable pricing power

Moat Durability Assessment

Key Question: "Will this moat be wider or narrower in 10 years?"

Answer: Likely SAME to slightly WIDER, provided the new customer diversification succeeds. The Penang Science Park North facility gives UMS capacity to serve multiple customers, and the aerospace segment adds diversification. But the moat is fundamentally NARROW - UMS is a supplier, not a monopolist.

Moat Rating: NARROW - Switching costs provide some protection, but ultimate customer concentration creates a fundamental vulnerability that limits moat width.

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PHASE 4: MANAGEMENT & INCENTIVE ANALYSIS

Compensation Structure (FY2024)

Assessment:

• Andy Luong's total compensation of SGD 5.5M represents 13.6% of net attributable profit. This is HIGH for a company of this size.
• The variable component (SGD 3.2M bonus) is 58% of total compensation - well aligned with performance
• However, SGD 1.3M in "allowances" is unusually high and warrants scrutiny
• No stock options or restricted shares - the CEO's alignment comes from his ~15.4% shareholding via trusts

Insider Ownership

Skin in the Game: Andy Luong's ~15% stake represents approximately SGD 147M of personal wealth tied to UMS's share price. This is strong alignment, though the trust structure adds complexity.

Capital Allocation Track Record (Last 5 Years)

Key Observations:

1. Dividend consistency is excellent - quarterly dividends maintained through the downcycle
2. Penang investment (RM250M / ~SGD 75M) was the right strategic move to diversify customer base
3. JEP Holdings consolidation (increasing stake from 29.5% to 79.55%) was a smart vertical integration move
4. Share placement (40M new shares at SGD 1.29 in Jan 2024) was dilutive but funded growth

Munger's Question: "If I were management with these incentives, what would I do?" I would focus on maintaining the AMAT relationship while diversifying the customer base, which is exactly what management is doing. The high variable bonus incentivizes strong near-term performance. The founder's stake incentivizes long-term value creation. Alignment appears reasonable.

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PHASE 5: CATALYST ANALYSIS (Klarman)

Positive Catalysts:

1. Penang factory ramp: Volume production commenced March 2024 for new customer. Expected to contribute significantly to FY2025-2026 revenue
2. Semiconductor upcycle: SEMI forecasts 15% growth in wafer fab equipment to $69.3B in 2026
3. Bursa secondary listing: Application submitted December 2024, could improve liquidity and attract Malaysian investors
4. AI capex boom: Both AMAT customers have given positive FY2025 guidance driven by AI investment

Negative Catalysts:

1. US-China export controls tightening further
2. AMAT inventory overhang persisting longer than expected
3. Penang new customer volumes disappointing
4. Global recession reducing semiconductor demand

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PHASE 6: DECISION SYNTHESIS

Megatrend Resilience

Total Score: +1 | Tier: 3 "Adaptable"

Expected Return with Probability Tree

Including 3.9% dividend yield = ~14.9% expected total return over 3 years, or ~4.7% annualized. This is inadequate for the risk involved.

Price Targets

Intrinsic Value Estimate: SGD 1.15 - 1.35 (mid-point: SGD 1.25)

Strong Buy:    SGD 0.88 (30% below IV mid-point)
Accumulate:    SGD 1.00 (20% below IV)
Fair Value:    SGD 1.25
Take Profits:  SGD 1.50 (20% above IV)
Sell:          SGD 1.88 (50% above IV)

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FINAL RECOMMENDATION

+---------------------------------------------------------------------+
|                     INVESTMENT RECOMMENDATION                        |
+---------------------------------------------------------------------+
| Company: UMS Integration Limited   Ticker: 558.SI                    |
| Current Price: SGD 1.35    Date: February 22, 2026                   |
+---------------------------------------------------------------------+
| VALUATION SUMMARY                                                    |
| +-------------------------+-----------+---------------------+        |
| | Method                  | Value     | vs Current Price    |        |
| +-------------------------+-----------+---------------------+        |
| | Graham Number           | SGD 0.87  | -55% (overvalued)   |        |
| | Net Current Asset Value | SGD 0.255 | -429% (overvalued)  |        |
| | Tangible Book Value     | SGD 0.467 | -189% (overvalued)  |        |
| | DCF (Conservative, 10x) | SGD 0.89 | -52% (overvalued)   |        |
| | DCF (Fair Value, 15x)   | SGD 1.33 | -2%                 |        |
| | Private Market Value    | SGD 1.37  | +1%                 |        |
| | Owner Earnings (18x)    | SGD 1.60  | +16%                |        |
| +-------------------------+-----------+---------------------+        |
|                                                                      |
| INTRINSIC VALUE ESTIMATE: SGD 1.25 (weighted mid-point)              |
| MARGIN OF SAFETY: -8% (NEGATIVE - stock is overvalued)               |
+---------------------------------------------------------------------+
| RECOMMENDATION:  [X] WAIT                                            |
+---------------------------------------------------------------------+
| STRONG BUY PRICE:     SGD 0.88 (30% below IV)                       |
| ACCUMULATE PRICE:     SGD 1.00 (20% below IV)                       |
| FAIR VALUE:           SGD 1.25                                       |
| TAKE PROFITS PRICE:   SGD 1.50 (20% above IV)                       |
| SELL PRICE:           SGD 1.88 (50% above IV)                       |
+---------------------------------------------------------------------+
| POSITION SIZE: 0% (Wait for entry)                                   |
| CATALYST: Penang new customer ramp + semi upcycle (2025-2026)        |
| PRIMARY RISK: 70%+ customer concentration in Applied Materials       |
| SELL TRIGGER: AMAT announces in-sourcing or persistent -FCF          |
+---------------------------------------------------------------------+

Verdict: WAIT - Quality B+ business at premium valuation with insufficient margin of safety.

UMS Integration is a competently managed precision engineering company with a strong founder, good cash generation, and an intelligent diversification strategy. The Penang factory ramp and semiconductor upcycle provide genuine catalysts. However, at SGD 1.35, the market has already priced in much of the recovery.

The critical flaw is customer concentration: ~70% of revenue from one customer is a structural risk that demands a substantial margin of safety. At 23-29x trough earnings, you are paying a quality premium for a cyclical business with a narrow moat. Wait for SGD 0.88-1.00 (a 25-35% pullback) to establish a position with adequate margin of safety.

Monitoring Metrics:

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SOURCES USED & DATA EXTRACTED

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Data Validation