UMS Holdings Ltd - CIMB Research 2016-03-01: 4Q15 boosted by margins

UMS HOLDINGS LIMITED 558.SI

UMS Holdings Ltd - 4Q15 boosted by margins

FY15 core net profit was ahead of our expectations at 114% of our forecast.
FY15 revenue was up only 1% but better sales mix and operation cost-savings contributed to core net profit expansion of 30.4% yoy.
Cash-generative business; FY15 DPS of 6 Scts translates into 11.3% dividend yield.

Diversification into aerospace industry could result in gains in the long term.
Maintain Add, with lower target price of S$0.63, still based on 1.38x FY16 P/BV.

UMSH reported weaker 4Q15 sales of S$21.9m, which fell 0.8% yoy and 28.7% qoq on the back of a decline in orders from its major customer. This was led by a 2% yoy drop in semiconductor integrated system sales but mitigated by a 205% yoy surge in consumables component sales.
On a full-year basis, FY15 revenue crept up 1%.

While there was only a slight improvement in sales revenue, FY15 core net profit jumped 30.4% due to various reasons:
1. a better gross margin of 60% in FY15 (FY14: 54%) as a result of higher component sales, which enjoyed higher margins and US$ appreciation,
2. cost-savings from relocation of operations to Malaysia, and
3. lower tax expenses.
With S$31.8m core net profit, FY15 was one of the best-performing years.

UMSH proved its superior cash-generating ability once again, with FY15 free cash flow of S$31.3m, higher than FY14’s S$28.9m.
It remained in a net cash position (no debt) as of end-Dec 15 and declared an FY15 DPS of 6 Scts, above our forecast of 5 Scts. This translates into a payout ratio of 75.1% and FY15 dividend yield of 11.3%.

In Nov 15, UMSH announced it was investing in All Star Fortress Sdn. Bhd., a Malaysian aerospace metallic component manufacturer, via a 10% equity stake and interest-bearing convertible loan of up to US$7.5m.
While UMSH could gain from some interest and rental income in the short term, it hopes to reap more substantial benefits in the long term as it diversifies into the aerospace industry, which management deems as a sector with high potential for growth.

Management expects 4Q15 softness in sales to extend into 1H16 given the global economic slowdown but investment spending by global foundries could recover in 2H16 to higher levels.
According to SEMI, a leading semiconductor trade association, global semiconductor equipment sales are projected to grow nominally at 1.4% in 2016.

We cut our FY16-17 earnings forecasts to reflect the cautious outlook of the semiconductor sector, reducing EPS estimates by 22.3%.
We maintain our base-case scenario of a 5-Sct DPS for FY16-18, translating into a dividend yield of 9.4%.
Maintain Add, with a lower target price of S$0.63, still based on 1.38x FY16 P/BV.

William TNG CFA CIMB Securities | NGOH Yi Sin CIMB Securities | http://research.itradecimb.com/ 2016-03-01

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