UMS HOLDINGS LIMITED
558.SI
UMS Holdings (UMSH SP) - Pedal To The Metal
Leveraged to IOT/ Big Data chips cycle
- UMS Holdings (UMSH) has had a longstanding relationship with its key customer, leading front-end semi-con equipment maker Applied Materials (AMAT US; NR, 80-90% of revenue contribution).
- Particularly, UMS manufactures the wafer transfer modules for the Endura deposition platform, as well as precision components found in other AMAT equipment.
- While management has cautioned for moderated demand from AMAT in 2H17, they remain optimistic towards growth prospects over the medium term, driven by a new generation of chips designs to cater for IOT/ Big Data.
Entrenched client partnership; strong capabilities
- UMS views high switching costs as a competitive advantage. It has full vertical integration, and is qualified for over 50 special semi-con equipment manufacturing processes that ensure stringent quality control and short lead time.
- In addition, it has a strong client relationship with AMAT, which according to Gartner, had 21% wafer-level equipment market share in 2016. UMS supplies c.70% of wafer transfer modules for AMAT’s Endura platform, a popular deposition system used for the chips metallisation process.
Why ENDURAnce is key
- In our meeting with UMS, management believes the 2H17 demand moderation from AMAT could be transitory, postulating short term inventory gestation on AMAT’s end.
- On the reduced ASP of the new Endura contract, UMS re-emphasised this was due to reduced scope for third-party input. While this would be top line sensitive, margin impact would likely be minimal.
- Additionally, by shifting the Endura production process to its new Penang plant in 3Q17, UMS expects to reap meaningful opex and tax savings longer term. Total capex for the new plant is MYR80m over 4-5 years, and it is mainly to cater for AMAT’s optimism towards Endura’s longer term growth trajectory.
Valuation
- UMS is currently trading at 10.2x consensus FY17 P/E (two estimates), for 67% forecasted earnings growth.
- Singapore-listed AEM, which manufactures back-end semi-con equipment for a global microprocessor giant is trading at 7.6x forward P/E. However, UMS has had a stronger profitability and cashflow track record than AEM over the past five years.
- Meanwhile, global semi-con peers are trading at 14.5x forward P/E for 57% expected earnings growth. However, much of the valuation premium is attributed to equipment market share leaders like AMAT and Lam Research with stronger competitive advantages.
COMPANY PROFILE
Business
- UMS specialises in manufacturing high-precision frontend semi-con components and modules, with manufacturing footprint in Singapore, Malaysia (Penang) and the United States (Texas and California). Key client Applied Materials has historically contributed 80-90% of revenue.
- Operates under two segments:
- Semiconductor (97% of FY16 revenue): UMS manufactures the wafer transfer modules for the Endura platform (70% share), as well as precision components for other AMAT equipment. Consumables components generate around SGD20m of revenue p.a., partially mitigating semi-con equipment cyclicality.
- Others (3% of FY16 revenue): Ships water disinfection systems via Kalf Engineering, as well as supplies base components to oil and gas OEMs.
Company Milestones
- Founded as Long’s Manufacturing in the US in 1984. UMS started in Singapore in 1996.
- Listed on SGX SESDAQ in 2001 and upgraded to the mainboard in 2003.
- Awarded the Endura contract from Applied Materials in 2009.
- Acquired Integrated Manufacturing Technologies in 2012. The US subsidiary specialises in cleanroom gaslines and weldment manufacturing.
- Completed subscription of 51% enlarged stake in Kalf for c.SGD1m in Mar-17.
- Endura contract with Applied Materials renewed in 1Q17 for another three years with option to extend for another three years.
- New Penang facility to begin operations in 2H17.
SWOT ANALYSIS
Strengths
- Sticky customer relationship with AMAT: UMS has had longstanding record of serving AMAT, and even has proprietary manuals for the Endura assembly.
- Engineering capabilities: UMS is vertically integrated and is qualified for over 50 special processes for the production of semi-con equipment components that ensures strong product execution and short lead time.
Weaknesses
- Single customer risk: AMAT contributes 80-90% of sales. This makes adding a new major client difficult, due to the large priority given to AMAT. That said, UMS plays a critical role in AMAT’s value chain due to the 70% wallet share for Endura wafer transfer modules. Management aims to grow non-semiconductor revenue contribution to 20% (FY16: 3%) in the medium term. Another risk is the non-renewal of the Endura contract.
- Conflict of interest: The large exposure to AMAT also implies that UMS will likely not be able to serve AMAT’s direct competitors as this represents a conflict of AMAT’s commercial interests.
Opportunities
- Possibility of new projects: Strong relationship with AMAT could also yield new integrated modules assembly projects.
- Growth optionality from Kalf and Allstar: Management is optimistic towards the prospects of Kalf’s electrochlorination systems. In addition, UMS has a 10%-stake, as well as convertible bonds in Allstar, a Malaysian aerospace manufacturing company. Allstar has recently been qualified by a major tier-1 aerospace vendor to supply aircraft components.
Threats
- Cyclicality risks: Semi-con industry is extremely cyclical, and capacity expansion plans are highly vulnerable to macroeconomic and political shocks.
- Competing technologies: Possibility of new technologies disrupting the relevance of the Endura platform, and/or any of AMAT’s products that UMS supplies components to.
- FX risk: Vulnerable to adverse movements in the USD. Contracts are priced in the greenback, but labour and operational costs are priced in domestic currencies, i.e. SGD and MYR.
BUSINESS OUTLOOK
- FY17 outlook: UMS is guiding for 3Q/4Q17 performance to be marginally weaker/comparable to 2Q17 (net profit: SGD11.5m). Management’s tone suggested that demand moderation from AMAT could be transitory, and there may be room for upgraded guidance. On the ASP erosion for Endura project, margin compression should be minimal as the ASP drop was due to reduced requirements of third-party materials.
- Intermediate outlook: Management echoed AMAT’s and broader industry optimism towards top line growth prospects. On the bottom line, relocating the Endura project to the new Penang facility is expected to yield meaningful opex (e.g. labour, utilities, rent) and tax savings.
- Capex and manufacturing strategy: New Penang facility capex is guided to be c.MYR80m over 4-5 years. About MYR30m has already been spent to cater for initial production which will begin late this year. While UMS will downsize manufacturing space in Singapore, it is unlikely it will exit entirely, due to the high relocation cost of some of the high value-add processes.
- M&A: UMS is keen to acquire small companies with synergistic technological capabilities to help grow and diversify revenue into adjacent industries. Kalf Engineering was one such acquisition.
GROWTH & VALUE PROPOSITIONS
Growth
- Leveraged to ongoing semi-con boom via client relationship with semi-con equipment market leader AMAT. In turn, AMAT supplies equipment to the likes of Intel and Samsung, etc.
- Chipmakers are currently birthing a new generation of chips and expanding capacity to cater for the IOT/ Big Data era.
- SEMI is forecasting for the global semi-con equipment market to grow 7.7% to SGD53.2b in 2018.
- Management is optimistic towards the prospects of Kalf’s electro-chlorination systems. In addition, Allstar has recently been qualified by a major tier-1 aerospace vendor to supply aircraft components.
- UMS is keen to gain a foothold into new industries. Ideally, acquisitions should be synergistic to UMS’s present expertise.
Value
- Solid balance sheet with SGD44m net cash position, which can be utilised for acquiring new technologies.
- Sustained cashflow generation and payouts (dividend payout-ratio averaged 80% in past five years) and solid balance sheet (SGD44m net cash as at Jun-17). The stock is trading at 7% forward yield, based on two estimates.
KEY RISK FACTORS
- Single customer risk: AMAT contributes 80-90% of sales, of which about half is contributed by the Endura sub-assembly. Amongst other risks, UMS is vulnerable to AMAT’s market share loss if competitors such as Lam Research come up with better technology.
- AMAT has historically settled UMS invoices in a timely manner, as the latter’s receivables days outstanding averaged 41 over the past five years. AMAT’s solvency ratios have also been decent (current ratio: 2.3x, acid-test ratio: 1.7x).
- Cyclicality risk: The front-end semi-con equipment market is extremely sensitive to cyclicality as well as macro and political shocks. For instance, AMAT’s prospects could be dampened as a result of any negative macro/ political surprises in China, where new capacity is currently focused at.
- FX risk: UMS is exposed to adverse movements in the USD. Contracts are priced in the greenback, but labour and operational costs are priced in domestic currencies, i.e. SGD and MYR.
NOT RATED
Target Price: N/A
Neel Sinha
Maybank Kim Eng
|
Lai Gene Lih
Maybank Kim Eng
|
http://www.maybank-ke.com.sg/
2017-09-14
Maybank Kim Eng
SGX Stock
Analyst Report
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