UMS Holdings - DBS Research 2018-05-14: Higher Gross Margins On Improved Mix

UMS Holdings - DBS Vickers 2018-05-14: Higher Gross Margins On Improved Mix UMS HOLDINGS LIMITED SGX: 558

UMS Holdings - Higher Gross Margins On Improved Mix

  • 1Q18 sales and net profit of S$37m and S$11.4m were in line.
  • UMS poised to benefit from Applied Materials’ double-digit growth in 2018; growth to be led by higher-margin Components business in FY18F.
  • Proposes interim dividend of 1 Sct.
  • Maintain BUY with Target Price of S$1.37.

What’s New

1Q18 net profit of S$11.4m in line.

  • UMS’ 1Q18 earnings rose slightly by 2.1% y-o-y to c.S$11.4m from S$11.2m as stronger gross margins helped offset higher staff costs and forex losses. Revenue fell 10.2% y-o-y to S$37m (vs S$40.9m in 1Q17) as contributions from Semiconductor Integrated Systems (-24.3% q-o-q to S$18.4m) was partly mitigated by stronger demand for Components (+12.7% to c.S$18.7m), which carries higher margins. 
  • Similar to previous quarters, the sharp c.24% y-o-y decline in Semiconductor Integrated Systems sales was due in part to lower Endura shipments, but also reflects revised contractual terms with lower third party content requirements, which kicked in from 3Q17. 
  • Meanwhile, the higher sequential sales for Endura (+1.1% q-o-q from S$18.2m in 4Q17) despite the 1Q seasonal lull provides support for expectations of a steady demand outlook for Endura.
  • Overall, the bottomline expansion was largely driven by an improved cost structure and margin mix, which lifted gross material margins from 51.4% (1Q17) to 57.4% (1Q18). 1Q18 sales and net profit formed 21% and 20% of our FY18F forecasts, respectively, which was in line.

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

  • SEMI raised its projections for global semiconductor manufacturing equipment sales in early 2018, which it believes will grow by 7.5% to a record US$60.1 bn, compared to US$58 bn previously. 
  • Separately, SEMI also highlighted vast potential in China’s chip market and predicts that the planned/ongoing construction of 24 new fab projects across China alone could prompt over US$11 bn of investments in new wafer fab equipment in 2018, and potentially surpass US$18 bn by 2020.

Expanded Penang facility ready for the ramp; upside to come primarily from higher-margin Components business.

  • Capacity utilisation for UMS’ Semiconductor Integrated Systems (Endura) and Components businesses currently stand 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. 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. As some of its operating cost and tax savings are passed through to its key client, this should enhance UMS’ pricing competitiveness, which bodes well for further order wins in the Components division. 
  • In 1Q18, UMS attributed the uptick in Components demand to higher component sales for a new built system, which suggests that UMS’ efforts in securing new higher-margin projects have started to bear fruit and should continue to feed through positively in the upcoming quarters.

Diversification underway as maiden contribution from newly acquired associate, JEP Holdings, kicks in.

  • UMS has been active on the acquisition front in the past 12 months. In January, the group amassed a c. 29.5% stake in aerospace-focused precision components supplier, JEP Holdings, and proposed the acquisition of a 70% stake in profitable and key raw material supplier, Starke Singapore in April – both are strategic and synergistic in nature.
  • While contributions from JEP are small at c.S$16K in 1Q18, we would view the turnaround and acquisition positively, as it marks UMS’ first earnings-accretive acquisition since it embarked on its diversification strategy in 2016 (including 10% stake in Allstar Manufacturing in 2016 and 51% stake in Kalf Engineering in 2017).
  • Further, we estimate that the acquisition of Starke, if successful, would provide the group with a good opportunity to secure cost savings, improve gross margins and enhance business and operational synergies through upstream integration of the supply chain of raw materials, and could also boost UMS’ FY18F earnings by 1-3%.

Maintain BUY with Target Price of S$1.37.

  • No change to our forecasts and recommendation as 1Q18 results were in line. We have yet to factor in contributions from Starke, as the timing of completion for the proposed acquisition remains unclear for now. 
  • Our Target Price of S$1.37 is based on 12x FY19F PE, at a discount to larger peers’ 15x given UMS’ higher customer concentration risk. 
  • At current UMS share price, an attractive prospective yield of c.5.8% is on offer.

Carmen TAY DBS Vickers | 2018-05-14
SGX Stock Analyst Report BUY Maintain BUY 1.370 Same 1.370