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).

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.

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.

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.

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