UMS Holdings - DBS Research 2016-08-15: Recovery from a weak 1Q

UMS Holdings  - DBS Vickers 2016-08-15: Recovery from a weak 1Q UMS HOLDINGS LIMITED 558.SI

UMS Holdings - Recovery from a weak 1Q

  • 2Q net profit grew 91% q-o-q to S$6.5m, helped by an uplift in demand and the stable USD/SGD.
  • Should benefit from client Applied Materials’ strong order book to deliver a slightly better 2H.
  • Declared interim dividend of 1 Sct (same as last year).



Maintain HOLD recommendation and TP of $0.61 

  • Maintain HOLD with TP of $0.61; expectations for key segments relatively mixed in the near term. 
  • Global semiconductor fab equipment spending has had a slow start in 2016. However, current global fab construction trends are poised to support an expected gain in momentum for equipping in the second half of 2016. This, coupled with a more optimistic rolling forecast from UMS’ key customer, Applied Materials, augurs well for UMS’ assembly business.
  • Separately, while UMS’ component manufacturing business should benefit from Applied Material’s strong order book (as at 2Q), we think the degree to which it could benefit in the near-term remains to be seen as the component manufacturing segment is operated on a JIT basis.


Yield of 8.6% should help hold up the stock. 

  • Until we see a clearer signal of a sustainable uptick in demand, we think that a 5-Sct dividend (as compared to 6 Scts paid in FY16F) would be more probable.


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

  • Maintain HOLD, with 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). UMS currently offers an attractive prospective yield of 8.6%.

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’ outlook




Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-08-15
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.610 Same 0.610


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