UMS Holdings - DBS Research 2017-08-14: Back To Yield For Now

UMS Holdings - DBS Vickers 2017-08-14: Back To Yield For Now UMS HOLDINGS LIMITED 558.SI

UMS Holdings - Back To Yield For Now

  • Record quarter for UMS unlikely to be repeated as potential weakness looms.
  • Cut FY17-19F earnings by 15%-20% as we prepare for some moderation in demand for Endura, but remain watchful for a recovery in its order book given Applied Materials’ still-rosy outlook.
  • Proposed 1-for-4 bonus issue; higher dividend payout for FY17F plausible.
  • Downgrade to HOLD with lower TP of S$1.13.



Front-end semiconductor equipment play offering decent growth and attractive 6.5% yield. 

  • UMS Holdings (UMS) has partnered closely with Applied Materials for more than a decade. Notably, despite its exposure to a cyclical industry, UMS’ earnings have been less volatile since it was awarded the Endura contract in 2010. 
  • The company also stands out for its strong cash flow (even after paying dividends) generation capabilities and consistent dividends, thus offering both yield and growth.


Where we differ: 

  • While a weaker order book for 2H17 could be temporary given firm end-demand and UMS’ entrenched relationship with Applied Materials, we choose to be more cautious on earnings growth ahead and recommend investors HOLD for a potentially higher dividend of 7 Scts (on pre-bonus basis), representing an attractive yield of 6.5%.


Potential catalysts: 

  • Higher demand for semiconductor equipment, diversification away from key client, M&A Positive industry data and outlook for key client Applied Materials generally augurs well for UMS, but 2H may still be weaker. 
  • SEMI predicts that global fab equipment spending could reach an industry all-time high of over US$49bn in 2017, before climbing above US$53bn in 2018. Reports by Applied Materials also imply robust demand and growth ahead.
  • We believe this augurs well for UMS given its primary role in the manufacture of components for various semiconductor equipment and that it handles c.70% of manufacturing and assembly for Applied Material’s Endura deposition system – especially given the successful extension of its Endura contract.
  • However, after riding on strong order momentum and delivering two consecutive quarters of record profits (in over a decade), rolling forecasts suggest that demand for Endura could moderate in 2H17 (vs 1H17). We have lowered earnings for FY17F-19F by 15-20% p.a. as we choose to be more cautious until there is clearer indication of a sustained recovery in order flow.


Valuation

  • Downgrade to HOLD with lower TP of S$1.13, which is based on 11x (or 10x ex-cash PE) FY18F PE, at a discount to larger peers’ 14x given key client risk. 
  • With rolling forecasts from Applied Materials suggesting that demand for Endura could moderate in 2H17 after the strong order momentum in 1H17, we choose to be more cautious until there is clearer indication of a sustained recovery in order flow, and have lowered earnings for FY17F-19F by 15-20% p.a.
  • Ahead of a recovery, we recommend investors HOLD for the potentially higher dividend of 7 Scts, which translates to an attractive yield of 6.5%.


Key Risks to Our View

  • Key client risk. Historically, c.90% of UMS’ revenues on average can be attributed to Applied Materials. Disruptions to the relationship or weakness in Applied Materials’ end demand could significantly weigh on UMS’ performance.


WHAT’S NEW


UMS delivers strong 2Q17 earnings (+77% y-o-y) but cautions of potential weakness ahead 

  • Record quarter for UMS may not be repeated as potential weakness looms. UMS continued to perform well in 2Q17 – net profit grew 77% y-o-y and 3% q-o-q to S$11.5m as both the Semiconductor Integrated System (+123% y-o-y to S$24.5m) and Components sales (+43% y-o-y to S$18.1m) segments did well, driving sales growth of 81% y-o-y and 2% q-o-q to S$42.7m.
  • While 1H17 profit of S$22.7m was in line at 49% of our FY17F estimates, management cautioned of moderating demand from its key customer in 2H17. This came as a surprise given positive industry data and the latter’s stillrobust demand and outlook.

Higher raw material costs could weigh on margins in 2H17.

  • Apart from expectations of weaker order flows in 2H17, we also see some near-term pressure on margins as the steady rise in aluminium prices observed over the last 6-9 months should gradually feed through to earnings from 3Q/4Q17.
  • Longer term, effects from rising raw material costs could also be mitigated by cost savings arising from the gradual shift of UMS’ Endura operations from Singapore to Penang from 3Q17 onwards.

Potentially higher dividends post 1-for-4 bonus issue.

  • In FY14, UMS maintained a fixed 6 Sct dividend per share, even on bonus shares. 
  • With the proposal of a 1-for-4 bonus issue this quarter, the company’s approach to managing dividends will likely be similar. As such, we think that a slightly higher dividend payout of c.7 Scts per share on a pre-bonus share basis (or 6 Scts post-bonus share issue) for FY17F is plausible, especially given the strong 1H17 performance and net cash of S$44.1m as at end-2Q17.




Carmen TAY DBS Vickers | Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2017-08-14
DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 1.13 Down 1.330



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