UMS Holdings - DBS Research 2017-05-15: All Systems Go

UMS Holdings - DBS Vickers 2017-05-15: All Systems Go UMS HOLDINGS LIMITED 558.SI

UMS Holdings - All Systems Go

  • 1Q17 earnings above; sales and profit surged 105% and 230% y-o-y to S$41.8m and S$11.2m.
  • To capitalise on strong end-demand, UMS to invest an additional RM80m in its Penang facility, growing annual production capacity by c.30% by end-2018.
  • Interim 1 Sct dividend per share proposed.
  • Maintain BUY with higher DCF-based TP of S$1.07.



Maintain BUY with higher TP of S$1.07; raised FY17F/18F earnings by 67%/79% 

  • Maintain BUY with higher TP of S$1.07; raised FY17F/18F earnings by 67%/79% as orders from positive semiconductor equipping trend kicks in. 
  • UMS surprised with a stronger than expected 1Q17 earnings of S$11.2m, which was c.41% of consensus and our full year estimates, as UMS’ orders surged on the back of higher fab equipment spending. SEMI predicts that global fab equipment spending could reach an industry all-time high of over US$46bn in 2017, before climbing closer to US$50bn in 2018.
  • Primarily involved in the manufacture of components for various semiconductor equipment and handling c.70% of manufacturing and assembly for Applied Material’s Endura deposition system, UMS is well-poised to benefit from these trends and plans to grow production capacity to capitalise on the strong end-demand.
  • With earnings momentum set to further strengthen, we maintain BUY with a higher TP of S$1.07, which implies FY18F ex-cash PE of just 7.4x.


Attractive 6.9% yield on offer. 

  • Current net cash of S$47.8m and proven cash flow generation capabilities should allow UMS to finance upcoming capex needs internally and support our expectations of a 6 Sct dividend per share, as well as potential for value-accretive M&A opportunities ahead.
  • Separately, the acquisition of a 51% stake in water and chemical engineering solutions company, Kalf Engineering, and investment in aerospace component business (via 10% stake in All Star Fortress Sdn. Bhd.) could bear fruit in the longer term.


Primed for takeover. 

  • The group only has one large shareholder with a 20% stake. With the renewal of the Endura contract providing good earnings visibility, strong cash flow and net cash (c.13% of market cap), UMS is an attractive takeover target.


Valuation

  • Maintain BUY with higher TP of S$1.07, which is based on DCF valuation with a cost of equity of 10% (as the group is in a net cash position) and terminal growth of 1%.


Key Risks to Our View

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


WHAT'S NEW


UMS records highest quarterly earnings in over a decade 1Q17 net profit of S$11.2m. 

  • UMS surprised in 1Q17 as earnings surged by 87% q-o-q and 230% y-o-y to S$11.2m – forming c.41% of consensus and our full year estimates. 
  • The robust earnings growth was on the back of strong sales growth, which was up 22% q-o-q and 105% y-o-y to S$41.8m, mainly as UMS' semiconductor business benefitted from higher global fab equipment spending.
  • The Semiconductor Integrated System (or manufacturing and sub-assembly of Applied Materials' Endura Deposition Systems) was the group's best performing segment, with sales jumping 192% y-o-y to S$24.3m, while revenue from Components segment increased 47% to S$16.6m in 1Q17. This comes shortly after the successful extension of UMS' Endura contract by 3+3 years in January this year.

Rosy outlook for semiconductor equipment: 

  • Buoyed by growing chip applications across the mobile device, automotive and IOT-related industries, SEMI (the global industry association serving the manufacturing supply chain for the micro- and nano-electronics industries) predicts that fab equipment spending will reach unprecedented levels in the coming years, reaching a record high of over US$46bn in 2017, before nearing the US$50bn mark in 2018.

Investing ahead. 

  • To capitalise on strong end-demand, UMS plans to invest an additional RM80m (approximately S$26m) at its Penang facility over the next few years, which should see 
    1. a shift in cleanroom operations away from its Singapore plant to optimise its cost structure, and 
    2. an expansion in production capacity - which we estimate to be at least 30%, when completed.

Low risk of dividend cut in FY17F. 

  • The group has proposed an interim dividend of 1-Sct. Sitting on an all-time high net cash of S$47.8m as at end-1Q17, and given strong cash flow generation, UMS should be well able to finance upcoming capex needs internally. At this point, it is unlikely that UMS will cut dividends from the 6-Sct paid over the last few years.
  • On the contrary, a higher dividend could be paid this year if earnings execution remains strong vis-a-vis 1Q.



Singapore Research Team DBS Vickers | Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2017-05-15
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.07 Up 0.730



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