UMS Holdings - DBS Research 2016-11-11: Holding steady

UMS Holdings - DBS Vickers 2016-11-11: Holding steady UMS HOLDINGS LIMITED 558.SI

UMS Holdings - Holding steady

  • 3Q net profit grew 5% q-o-q to S$6.8m.
  • Degree to which UMS benefits from client Applied Materials’ strong order book hinges upon the renewal of the Endura contract.
  • Declared interim dividend of 1 Sct.
  • Maintain HOLD recommendation and TP of S$0.61.


Maintain HOLD with TP of S$0.61 as we keep an eye on the status of the Endura contract, due to expire in Jan-17. 

  • While favourable industry trends, coupled with Applied Materials’ strong order book, augurs well for UMS Holdings (UMS)’s core businesses, we believe that the extent to which UMS benefits from the former’s strong growth prospects ahead mostly hinges upon the renewal (and if successful, revised contractual terms) of the Endura contract, which is due to expire in Jan-17.
  • Near-term, following better traction in both its components manufacturing and assembly businesses in 3Q16 – which led to 10.5% q-o-q growth in group revenue, and a positive indicative rolling forecast from its key client, we continue to remain optimistic of UMS’ ability to maintain its momentum into 4Q, to potentially deliver a stronger second half of 2016.


Yield of 8.2% should help hold up the stock. 

  • Until we see a clearer signal of a sustainable uptick in demand, we think that a dividend per share of 5 Scts (as compared to 6 Scts paid in FY15) is more probable.


Capex trends of chipmakers point to potentially higher demand towards end-2017. 

  • The construction of new 300mm fabs by chipmakers provides early indication of a potential round of equipment spending towards the end of 2017. All else constant, UMS should naturally benefit as it is involved in the manufacture of components for various semiconductor equipment and also handles c.70% of manufacturing and assembly for Applied Material’s Endura system.
  • Further, its recent investment in an aerospace component business (via 10% stake in All Star Fortress Sdn. Bhd.) could bear fruit in the longer term.


Valuation

  • Maintain HOLD, with TP of S$0.61, which is based on DCF valuation with a cost of equity of 10% (as the group is in a net cash position). 
  • UMS currently offers an attractive prospective yield of 8.2%.


Key Risks to Our View

  • Key client risk. Historically, between 80-90% of UMS’ revenues on average can be attributed to Applied Materials. Disruptions to its existing entrenched relationship or weakness in Applied Materials’ end demand could significantly weigh on UMS’ outlook.




Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-11-11
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.610 Same 0.610




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