UMS Holdings - DBS Research 2017-03-02: Attractive takeover target

UMS Holdings - DBS Vickers 2017-03-02: Attractive takeover target UMS HOLDINGS LIMITED 558.SI

UMS Holdings - Attractive takeover target

  • UMS riding on strong demand to deliver better than expected 4Q16 earnings.
  • Successful renewal of Endura contract by 3+3 years provides earnings visibility into 2023.
  • Dividend of 6Scts for FY16 represents yield of 8.9%.
  • Upgrade to BUY, with higher TP of S$0.73.

Upgrade to BUY with higher TP of S$0.73; raised FY17F/18F earnings by 13%/10%

  • ... as UMS is well positioned to benefit from positive global semiconductor equipping trends. The construction of new 300mm fabs by chipmakers provides early indication of a potential round of equipment spending towards the end of 2017.
  • Key client, Applied Materials, which contributes c.90% of the group’s revenue and profit on average, is poised to benefit from this trend.
  • Involved in the manufacture of components for various semiconductor equipment and handling c.70% of manufacturing and assembly for Applied Material’s Endura deposition system, UMS should naturally benefit from the positive semiconductor industry outlook, with earnings visibility strengthened by the successful renewal of the Endura contract by 3+3 years to Jan 2023.
  • Given the improved earnings profile and attractive 8.9% yield, we upgrade UMS to BUY, with potential total return of 17%.

Attractive yield of 8.9% on offer. 

  • The uptick in end-demand, coupled with UMS’ strong cash flow generation and net cash position of S$42.4m supports our expectations of dividends of 6 Scts dividend for FY17F, as well as to leverage on potential valueaccretive M&A opportunities.
  • Separately, the proposed acquisition of a 51% stake in water and chemical engineering solutions company, Kalf Engineering, and investment in aerospace component business (via 10% stake in All Star Fortress Sdn. Bhd.) is likely to bear fruit in the longer term.

Primed for takeover. 

  • The group only has one large shareholder with a 20% stake. With the renewal of the Endura contract providing good earnings visibility, strong cash flow and net cash of S$42.4m (c.15% of market cap), UMS is an attractive takeover target.


  • Upgrade to BUY with TP of S$0.73, which is based on DCF valuation with a cost of equity of 10% (as the group is in a net cash position). 
  • Coupled with an attractive prospective yield of 8.9%, UMS potentially offers total return of 17%.

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/ 2017-03-02
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