UMS Holdings Ltd - CIMB Research 2017-05-12: Hold On To This!

UMS HOLDINGS LIMITED 558.SI

UMS Holdings Ltd - Hold On To This!

1Q17 core net profit beat our forecasts handily at 46% of our FY17 forecast, as well as consensus by 49%.
1Q17 revenue grew a strong 105% yoy driven by strong orders from customers.
Declared 1 Scts DPS. Record net cash position of S$47.8m at end-1Q17.

Company not only expects improved performance in FY17 but has also announced capex plan of RM80m in Penang over the next few years.
We have a higher TP of S$1.15 as our P/BV multiple (Gordon Growth, cost of equity, 8.0%, zero growth) rises to 2.41x (previously 1.85x) due to improving ROEs.

1Q17 net profit of S$11.2m is the highest first quarter performance since 2004. We attribute this to revenue growth which was driven by a 192% yoy rise in Semiconductor Integrated System (SIS) sales and a 47% yoy rise in component sales.
Gross material margin was however lower at 51% versus 60% in 1Q16 as SIS sales command lower margins versus component sales.
1 Sct DPS was declared and the balance sheet was at a record net cash position of S$47.8m at end-1Q17.

Management notes that SEMI (Semiconductor Equipment and Materials International) expects Fab equipment spending to reach an industry all-time record of more than US$46bn in 2017 followed by another record of US$50bn in 2018. The largest growth drivers for the industry are mobile devices, automotive, and IoT (Internet of Things).
Barring unforeseen circumstances, the Board of Directors remains optimistic that the Group will deliver an improved performance in FY2017.

Another positive is that UMS will be budgeting RM80m capex for Penang for the next few years. This will be a win-win for both UMS and Applied Materials (AMAT) as UMS will be able to meet the higher volume demand from AMAT on a cost structure that benefits both parties.
UMS will also gain access to a larger pool of talent and more favourable tax status.

UMS recently took a 51% stake in Kalf Engineering, a company that specialises in water and chemical engineering solutions for the offshore, power generation and chemical industries. Kalf has secured seven projects in Asia, the Middle East and South America worth approximately S$13m.
Kalf’s results will be consolidated into UMS results from 2Q17 onwards. We are not factoring in any contribution from Kalf for the moment.

We raise our FY17-19 core EPS forecasts by 50-62.1% as we project higher orders from AMAT.
Given the projected improvement in ROEs, our target price rises to S$1.15 (2.41x P/BV based on Gordon growth, cost of equity, 8.0%, zero growth; previous P/BV was 1.85x). Implied CY18F P/E of 11.1x is below its peer average of 13.0x.
Key risk to our call is the current semiconductor upcycle being shorter than our projected two years.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-05-12

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