UMS Holdings - DBS Research 2016-04-15: Play on dividends ahead of recovery

UMS Holdings - DBS Research 2016-04-15: Play on dividends ahead of recovery UMS HOLDINGS LIMITED 558.SI 

UMS Holdings - Play on dividends ahead of recovery 


Initiate with BUY and TP of S$0.73 based on DCF; entrenched relationship with Applied Materials provides earnings stability and underpins high yield. 

  • UMS Holdings (UMS) has partnered with Applied Materials for more than a decade. 
  • Notably, despite its exposure to a cyclical industry, UMS’ earnings have stabilised significantly since it was awarded the Endura contract in 2010. 
  • The Group has also been generating stable cash flows (even after paying dividends), which coupled with its strong cash position of 9-Sct net cash per share and low capex needs, provides further security for an expected 6-Sct dividend payout going forward. 

Expect current industry down-cycle to weigh on near-term earnings, but capex trends of chipmakers point to potential demand at end-2017. 

  • Expect weaker earnings in FY16F on flat demand for equipment and normalisation of margins, but construction of new 300mm fabs by chipmakers provides early indication of a potential round of equipment spending at end- 2017. 
  • 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, recent investment in aerospace component business could bear fruit in the longer term. 

  • We believe that risk inherent in UMS’ recent diversification via a 10% stake in ASF will likely be low, given the small initial investment, but could set the stage for longer-term growth, especially with the increasing trend of international aerospace players outsourcing more work. 

Valuation: 

  • Our TP of S$0.73, which is based on DCF with a cost of equity of 10% (as the Group is in a net cash position), offers an attractive yield of almost 10%. 
  • The stock is currently trading cum dividend of 3 Scts, which goes ex on 5 May. 

Key Risks to Our View: 

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



Paul Yong CFA DBS Vickers | http://www.dbsvickers.com/ 2016-04-15
DBS Vickers SGX Stock Analyst Report BUY Initiate BUY 0.73 Same 0.73


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