UMS Holdings Ltd - 4Q16: Continuity assured, dividends assured
- FY16 core net profit was 11% below our forecast due to an exchange gain of S$1.2m.
- Declared 3 Scts DPS (2 cts final, 1 cts special). Balance sheet remains in net cash position.
- Company expects to remain profitable in FY17.
- We have a higher TP of S$0.82 as we switch our valuation basis to 1.85x P/BV (Gordon Growth, cost of equity, 7.7%, zero growth).
Key takeaways from 4Q results
- Reported net profit fell 34% yoy in 4Q16 as sales fell 6% yoy. Adjusting for impairment of goodwill (S$1.6m) and provision for inventories (S$3.7m), adjusted 4Q net profit would have been a better S$27.9m.
- A final DPS of 2 Scts and a special DPS of 1 Scts were declared. Full-year DPS amounted to 6 Scts.
- Balance sheet remains in net cash.
Applied Materials contract renewed
- UMS announced that it has renewed its integrated systems business contract with a key customer Applied Material for another three years, with the option to extend that a further three years. We believe this will re-rate its share price as investors have been concerned about non-renewal of this contract.
- We believe UMS will be able to weather the cost down pressure from this contract renewal as it has done before. Nonetheless, we have factored in lower gross material margin into our FY17F-19F forecast.
Positive FY17 outlook
- Management expects to be profitable in FY17, citing a projection by global industry association SEMI in the SEMI Year-end Forecast released in Dec 16 that worldwide sales of new semiconductor manufacturing equipment will increase 8.7% in 2016 and 9.3% in 2017.
- UMS has also recently made another attempt to diversify its business via a proposed investment into a Singapore water and chemical engineering solutions company.
- We raise our core EPS by 3.8% for FY17F as we project higher sales. With the renewal of its contract with Applied Material, we switch to Gordon Growth valuation to better reflect its ROE potential (previously average P/BV).
- Our derived P/BV of 1.85x (cost of equity, 7.7%, zero growth) translates to a TP of S$0.82 (CY17F BVPS).
- Implied CY18F P/E of 12.3x is in line with its peer average.
- Key risk to our call is underestimation of the price discount given by UMS to secure the renewal of the Applied Material contract.