UMS Holdings - DBS Research 2016-05-11: Bracing for weakness ahead

UMS Holdings - DBS Research 2016-05-11: Bracing for weakness ahead UMS HOLDINGS LIMITED 558.SI 

UMS Holdings - Bracing for weakness ahead

  • 1Q16 earnings disappointed, falling 55% y-o-y to S$3.4m, mostly on forex losses and weak demand
  • 2H16 outlook mixed; assembly business is expected to pick up, but it is still too early to tell for components manufacturing segment
  • Announced interim dividend of 1Sct
  • Rating cut to HOLD, TP S$0.61



Downgrade to HOLD; TP lowered to $0.61. 

  • We cut FY16/17F earnings by 24/19% as we imputed a steeper revenue decline for FY16F, modest topline growth from FY17F onwards, and an average of 2ppts lower net margins.
  • 1Q16 net profit below expectations. 1Q16 net profit fell sharply by 55% y-o-y to S$3.4m, primarily due to net foreign exchange loss of S$1.9m after the USD (almost 100% of UMS’ revenues) depreciated c.5% against the SGD. 
  • During the quarter, we also saw weak demand for both of the group’s core segments - semiconductor components manufacturing and sub-assembly. 
  • UMS declared an interim dividend of 1Sct, to be paid on 29th July.


Weaker FY16F outlook likely to lower dividends to 5Scts, from 6Scts previously. 

  • The current industry downcycle is likely to continue to weigh on 2Q numbers, while expectations for 2H16 are mixed. 
  • Rolling forecasts from UMS’ key customer indicate improving demand for the assembly business while we believe it is still too early to tell for components manufacturing, given the group’s just-in-time (JIT) model.
  • With expectations of a dull FY16F, despite sitting on a strong net cash position of c.S$42.8m (almost 10Scts per share), we cut our dividend forecast to 5Scts.


Capex trends of chipmakers point to potentially higher demand towards end-2017. 

  • The construction of new 300mm fabs by chipmakers provides early indication of a potential round of equipment spending towards the end of 2017. All else constant, 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, its recent investment in an aerospace component business (via 10% stake in ASF) could bear fruit in the longer term.


Valuation:

  • Downgrade to HOLD, with lower TP of S$0.61, which is based on DCF valuation with a cost of equity of 10% (as the group is in a net cash position). 
  • At our revised TP, UMS offers a prospective yield of c.8%.


Key Risks to Our View:

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




Paul Yong CFA DBS Vickers | http://www.dbsvickers.com/ 2016-05-11
DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 0.61 Down 0.73


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