UMS Holdings - DBS Research 2018-02-28: Beneficiary Of Applied Materials’s Strong Growth

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UMS HOLDINGS LIMITED 558.SI

UMS Holdings - Beneficiary Of Applied Materials’s Strong Growth

• UMS delivers record 4Q17 profits of S$15.8m on firm growth momentum and positive one-off effects.
• Enlarged Penang facility ready for the ramp; plans to bring on additional capacity signals optimism over longer-term growth prospects.
• Cost savings should more than offset ASP reduction to drive earnings growth over FY17-19F.
• Maintain BUY with higher Target Price of S$1.37; attractive 5.3% yield also on offer.

Maintain BUY with higher Target Price of S$1.35; front-end semiconductor equipment play offering growth and attractive c.6% yield. 

• UMS Holdings (UMS) has partnered closely with Applied Materials for more than a decade. Notably, despite its exposure to a cyclical industry, UMS’s 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.
• Firm momentum and one-off gains/writebacks took UMS’s 4Q17 earnings to a record S$15.8m. Entering into 2018, growth will mainly be supported by a ramp-up in its higher-margin Components business and cost benefits arising from its shift to Penang. 
• With imminent cost savings set to offset the impact of lower ASPs, we raise our earnings projections slightly by 6-8% for FY18-19F and roll forward our earnings base to FY19F to arrive at a higher Target Price of S$1.37. Maintain BUY.

Where We Differ:

• We have assumed a larger discount to larger peers’ 15x FY18F PE compared to consensus given its higher customer concentration risk vs peers.

Potential Catalysts:

• Higher demand for semiconductor equipment, diversification away from key client, earnings-accretive M&As 

Positive outlook for key client Applied Materials augurs well for UMS.

• SEMI predicts that global fab equipment spending could reach industry all-time highs of over US$60.1bn in 2018. Reports by Applied Materials also imply robust demand and a CAGR of c.10% into FY20F. 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 Materials’s Endura deposition system – especially given the successful extension of the Endura contract.

Valuation

• Maintain BUY with higher Target Price of S$1.37, which is based on 12x (or 11x ex-cash PE) FY18F PE, at a discount to larger peers’ 15x. 
• An attractive prospective yield of over 5% is on offer.

Key Risks to Our View

Key client risk. 

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

WHAT’S NEW - FY17 a record year for UMS 

New earnings record; 4Q17 slightly above on several one-offs . 

• UMS’s strong 3Q17 momentum was sustained into 4Q. Sales remained stable at c.S$38.7m (vs S$39.3 in 3Q), as the sequential decline in contributions from Semiconductor Integrated Systems (-10.3% q-o-q to S$18.2m on the back of lower Endura shipments) were partly offset by stronger contributions (+1.4% to c.S$19.3m) from the higher-margin Components business. 
• With contributions from the two key segments holding relatively steady q-o-q, gross material margins were thus maintained at c.58.3% in 4Q17, similar to c.58.8% in 3Q. Meanwhile, earnings came in slightly above as one-off disposal gains and writebacks more than offset the impact of forex losses and higher personnel costs to provide an added boost to earnings. Stripping out nearly c.S$3.4m in one-offs, FY17 PATMI would otherwise have been in line at c.S$48.6m vs our forecast of S$47.9m (+1.1%).

UMS could benefit from Applied Materials’s double-digit growth in 2018. 

• SEMI recently raised its projections for global semiconductor manufacturing equipment sales in 2018, which it believes will grow by 7.5% to a record US$60.1bn, compared to US$58bn previously. 
• Separately, SEMI also highlighted vast potential in China’s growing chip market and predicts that the planned/ongoing construction of 24 new fab projects across China alone could prompt over US$11bn of investments in new wafer fab equipment in 2018, and potentially surpass US$18bn by 2020.
• Applied Materials also maintained its positive guidance during its 4Q17 results in November, reiterating expectations of double-digit revenue and profit growth in 2018. Underlying demand trends also support Applied Materials’ rosy outlook, particularly
  1. ongoing capacity additions to meet growing demand for sensors and IoT devices, and
  2. demand shifts from lithography to materials deposition and removal arising from the transition to 3D memory.

Cost savings to more than offset ASP reduction, driving earnings CAGR of 8.8% over FY17-19F; upside from further order wins. 

• Capacity utilisation for UMS’s Semiconductor Integrated Systems (Endura) and Components businesses currently stands at > 90% and c.65% respectively. UMS is also in the midst of bringing in new machines, which would effectively raise capacity for Endura by c.30% by mid-2018, which signals the company’s optimism over long-term growth prospects.
• Guiding for strong order flow with its key customer, utilisation should improve as UMS ramps up progressively in subsequent quarters. Following the completion of its shift to Penang, UMS is also poised to reap substantial cost benefits, which should kick in from FY18F.
• While ASPs could trend lower as some of its operating cost and tax savings are passed through to its key client, we would argue that the improved pricing competitiveness bodes well for further order wins as it signals UMS’s willingness to sacrifice some margins in favour of volume growth.

Proposed 3-Sct final dividend. 

• UMS also proposed a 3-Sct interim dividend to be paid on 25 May 2018, bringing total dividends paid up c.17% from 6 Scts (pre bonus issue)/4.8 Scts (post bonus issue) per share in FY16 to 7 Scts/5.6 Scts in FY17.
• Similar to previous years, UMS is likely to maintain a 6-Sct payout in FY18F, which represents an attractive prospective yield of at least 5.3%.

Maintain BUY 

• Maintain BUY with higher Target Price of S$1.37 as we raise our earnings projections slightly by 6-8% for FY18-19F to factor in higher cost savings, and roll forward our earnings base to FY19F.

Carmen TAY DBS Vickers | http://www.dbsvickers.com/ 2018-02-28

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.37 Up 1.210