UMS Holdings Ltd - CIMB Research 2017-11-10: We Expect Demand To Sustain Into FY18

UMS Holdings Ltd - CIMB Research 2017-11-10: We Expect Demand To Sustain Into FY18 UMS HOLDINGS LIMITED 558.SI

UMS Holdings Ltd - We Expect Demand To Sustain Into FY18

  • UMS’s 3Q17 net profit hit a new record of S$13.6m on strong demand from its major customer.
  • Higher revenue contribution from better-margin component sales led to 3Q17 net profit coming in above our expectation, at 34% of our full-year forecast.
  • Guidance of a strong pipeline of orders and the transfer of more production activities to lower cost Penang lead to further upwards revisions to our FY18-19F core EPS.
  • We believe board will need to deliberate a higher special DPS given strong FY17F.
  • Target Price rises to S$1.21 as we increase our P/BV multiple to 2.88x, from 2.80x previously, on higher ROEs.

Record 3Q17 net profit 

  • UMS's 3Q17 net profit hit a record S$13.6m; the highest since we first initiated coverage on this stock in 2010. 
  • 3Q17 and 9M17 revenues, at 26% and 78% of our full-year forecasts, were in line. However, the higher revenue contribution from its better margin component business led to the 3Q17 net profit coming in above our expectations, at 34% of our fullyear estimate.

Gross material margin hit 58.8% in 3Q17 

  • Gross material margin reached 58.8% in 3Q17 (1Q17: 51.4%; 2Q17: 51.1%). In 3Q17, better-margin component sales accounted for 48% of the total turnover while the comparatively lower-margin integrated systems business accounted for the rest.

Cash pile has also risen 

  • UMS’s cash balance at end Sep-17 was S$64.3m. During the quarter, UMS took on S$20.4m in borrowings but the company remains in a net cash position. Free cash flow generated during the quarter was S$6.5m and during the first nine months was S$23.7m.
  • In line with its past track record, an interim DPS of 1.0 Sct was declared.

Confident on outlook 

  • UMS remains confident about its outlook for FY18. The company highlighted that its major customer has projected accelerated growth in the coming quarter. 
  • UMS also has a strong pipeline of orders from its key customer and will benefit from cost savings as it shifts production to lower cost Penang next year. The company has also received in-principle approval for a new 10-year Pioneer Tax Incentive for its Malaysian subsidiary.

We believe FY18F core EPS could still grow yoy 

  • Given the strong 3Q17 performance, we have raised our FY17-19F core EPS forecasts by 4-7%. We believe the Board should deliberate a higher special DPS for FY17 given the record performance this year. 
  • TP raised to S$1.21 on a higher 2.88x P/BV multiple (ROE: 23%, COE: 7.8%) versus 2.80x previously. 
  • Key downside risk is unexpected pullback in orders by its major customer.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-11-10
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.21 Up 1.130