UMS Holdings Ltd - CIMB Research 2017-08-11: Demand To Moderate In 2H

UMS Holdings Ltd - CIMB Research 2017-08-11: Demand To Moderate In 2H UMS HOLDINGS LIMITED 558.SI

UMS Holdings Ltd - Demand To Moderate In 2H

  • UMS' 2Q17 net profit formed 29% of our full-year forecast. 1H17 was 56% of our FY17F, in line with the historical average of 53% for FY10-16.
  • 2Q17 revenue grew a strong 81% yoy, driven by strong orders from its key customer.
  • Declared 1 Scts DPS. Net cash position of S$44.1m at end-2Q17.
  • Management expects its major customer’s demand to moderate in the second half.
  • Target Price cut to S$1.12, reflecting our earnings cut for weaker 2H outlook. Our P/BV multiple (Gordon Growth, cost of equity: 8.6%, zero growth) falls to 2.39x from 2.41x.

2Q17 deemed in line 

  • UMS' 2Q17 net profit of S$11.5m formed 29% of our full-year forecast. 
  • 1H17 net profit of S$22.7m formed 56% of our full-year forecast, in line with the historical average of 53% (FY10-16). 
  • Gross material margin was 51% in 2Q17 (2Q16:58%) and 51% in 1H17 (1H16: 59%) due to higher sales proportion of Integrated Systems that command a lower margin compared to component sales. 
  • 1 Sct DPS was declared and the balance sheet remained in a net cash position of S$44.1m at end-2Q17.

Outlook remains positive… 

  • Management notes that Semiconductor Equipment and Materials International (SEMI) expects Fab equipment industry spend to reach an all-time record of more than S$49.4bn (+19.8% yoy) in 2017, followed by another record of S$53.2bn (+7.7% yoy) in 2018.
  • Barring unforeseen circumstances, UMS’s Board of Directors remains optimistic that UMS will remain profitable in FY17F. A 1-for-4 bonus issue was also announced.

…but demand to moderate in 2H 

  • Management said UMS’s major customer’s demand is expected to moderate in 2H17.
  • The renewed system integration contract announced earlier this year has a lower average selling price. UMS will mitigate this via efforts to increase production activities in lower-cost Penang. Its new cleanroom and new system integration team in Penang will be ready in 3Q17.

Kalf Engineering will not contribute in FY17F 

  • UMS has guided that its newly-acquired subsidiary Kalf Engineering will continue to pursue projects both in Singapore and overseas, and will make maiden but insignificant contributions to the group in FY17F. However, its contributions are not expected to be significant in FY17F due to some project delays. 
  • Note that we have not factored in any contribution from Kalf Engineering in our forecasts for now.

Downgrade to Hold 

  • We cut our FY17F EPS by 5.0% to factor in the guidance of moderating demand in 2H17.
  • Our target price dips to S$1.12 (previously S$1.15), based on 2.39x P/BV (previously 2.41x). Our derived 2.39x P/BV multiple is based on Gordon growth (cost of equity: 8.6%, zero growth). Implied CY18F P/E of 10.9x is below its peer average of 11.7x. 
  • Key risk to our call is a shorter current semiconductor upcycle than our projection of two years.
  • Upside risk is an unexpected short-term spike in demand from its key customer.

William TNG CFA CIMB Research | 2017-08-11
CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 1.12 Down 1.150