UMS Holdings Ltd - CIMB Research 2018-02-28: FY18 Could Be Another Record Year

UMS Holdings Ltd - CIMB Research 2018-02-28: FY18 Could Be Another Record Year UMS HOLDINGS LIMITED 558.SI

UMS Holdings Ltd - FY18 Could Be Another Record Year

  • UMS Holdings' 4Q17/FY17 net profit came in above expectations at 34%/111% of our FY forecast. FY17 performance was driven by higher contribution from better margin component sales. Gross material margin for FY17 was 54.7%.
  • It declared a DPS of 3Scts in 4Q17, as per historical practice.
  • UMS remains positive on FY18 outlook as its key customer is looking at double-digit revenue and profit growth in 2018.
  • Raise Target Price to S$1.31, based on a higher 2.95x P/BV multiple (previously 2.88x).

FY17 net profit 11% above forecasts 

  • UMS Holdings' 4Q17/FY17 revenue at 23%/98% of our full-year forecast was in line with our expectations. 4Q17/FY17 net profit at 34%/111% was ahead of our expectations. 
  • The key reason for the better-than-expected performance was the higher contribution from component sales which yield better margins compared to system integration sales. Component sales accounted for 51.5% of the semiconductor segment’s revenue in 4Q17.
  • One-off items One-off items that aided profitability in 4Q17 were:
    1. S$1.8m gain on disposal of machinery;
    2. S$1.1m gain from reversal of allowances for inventory obsolescence; and 
    3. S$0.5m tax credit. 
  • Offsetting these gains was an exchange loss of S$0.8m due to the depreciation of the US$ against the S$ in 4Q17. Depreciation expenses also fell 12% y-o-y to S$1.0m as more assets became fully-depreciated.

Strong cash flow – dividend track record continues 

  • UMS generated S$59.6m in operating cash flow before working capital changes for FY17. Cash flow from operations was S$39.2m mainly as S$16.7m cash was tied up in inventories due to the commencement of a new parts consignment programme with its major customer. 
  • Capex of S$10.6m in FY17 was part of the previously announced RM80m capex plan to expand the Penang facility. 
  • It declared a DPS of 3Scts for 4Q17, in line with its historical practice.

Diversification opportunity with JEP 

  • On 17 Jan 2018, UMS announced it has purchased a 29.5% stake in SGX-listed JEP Holdings which has a strong track record as a supplier of aerospace components for the world’s leading aircraft manufacturers. If successful in the next few years, JEP could help UMS’s share price re-rate as customer concentration risk will be reduced.

Positive FY18 outlook 

  • On its FY18 outlook, UMS guided that prospects remain bright. The company notes that industry association, SEMI, has projected that global sales of new semiconductor manufacturing equipment will grow 7.5% in 2018. Its key customer is also forecasting double-digit revenue and profit growth in 2018. 
  • UMS is also ready to take on higher volumes from its major customer as it has enlarged its production capacity in Penang.

Maintain ADD 

  • We raise FY18F EPS by 10.6% as we factor in stronger revenue growth. FY19F EPS is raised by 5.2% as we reduce our sales decline forecast. Our Target Price rises to S$1.31, now based on 2.95x P/BV (ROE: 20.1%, COE: 6.8%) vs. 2.88x previously. 
  • Key downside risk is unexpected pull-back in orders by its major customer. 
  • Dividend yield of 5.26% remains attractive.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2018-02-28
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.31 Up 1.210