UMS Holdings Ltd - CIMB Research 2016-11-11: We see qoq earnings momentum

UMS Holdings Ltd - CIMB Research 2016-11-11: We see qoq earnings momentum UMS HOLDINGS LIMITED 558.SI

UMS Holdings Ltd - We see qoq earnings momentum

  • 9M16 core net profit was 81% of our FY16 forecast, better than expected as sales decline was less drastic than we feared. Strong cost management also helped.
  • Gross material margin at 57% in 3Q16 vs. 55% in 3Q15.
  • Declared 1 Scts DPS. Balance sheet remains in net cash position.
  • Company expects to remain profitable in FY16F. We expect positive qoq earnings momentum.
  • Rolling over to CY17F, our target price rises marginally to S$0.64 (1.38x P/BV).

Takeaways from 3Q results 

  • The key takeaway from 3Q16 results was that management executed well on cost control in an environment where sales was slow. 
  • Employee benefits expenses fell 17% yoy in 3Q16 and rental expenses declined 41% yoy as the company better managed its space requirements. 
  • Lower maintenance of machinery and equipment during the quarter and lower utilities expenses also helped. 
  • UMS also provided for US$0.7m in inventories obsolescence.

Balance sheet remains strong 

  • During the quarter, UMS generated free cashflow of US$6.4m. On a 9M basis, free cash flow was US$13.6m. Net cash position at end-3Q16 was US$27.6m. 
  • A dividend per share of 1.0 Scts was declared which was in line with its historical trend. 
  • Receivables increased due to higher sales compared while trade payables were also higher in anticipation of continued business momentum in 4Q16.

Positive on outlook 

  • Management expects to be profitable in FY16F, citing the Aug update of the World Fab Forecast report by SEMI, showing increasing equipment spending, reaching 4.1% yoy in 2016 and 10.6% yoy in 2017. 
  • Applied Materials (key customer of UMS) forecasted a compounded earnings growth of about 17% over the next three years. We believe that UMS’s 4Q16 performance will be similar or slightly better than its third quarter.

Maintain Add 

  • We raise our core EPS by 7.7% for FY16F as we project higher sales in 4Q16. 
  • With a base DPS of 5 Scts for FY16F-17F, prospective dividend yields are 8.2%. 
  • Management is receptive to declaring a higher dividend if there is no competing use for its excess capital. In FY15, UMS paid 6 Scts in DPS. 
  • Rolling over to FY17F, our target price rises to S$0.64 based on 1.38x P/BV (ave. P/BV when profit was recovering in FY06 and FY13). 
  • Key risk to our call is non-renewal of its contract with Applied Materials in FY16.

Willam TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-11-11
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.640 Up 0.630