UMS Holdings Ltd - CGS-CIMB 2018-05-14: Never Hurts To Be Cautious

UMS Holdings Ltd - CGS-CIMB 2018-05-14: Never Hurts To Be Cautious UMS HOLDINGS LIMITED SGX: 558

UMS Holdings Ltd - Never Hurts To Be Cautious

  • We deem UMS Holdings' 1Q18 sales, at 21% of our full-year forecast, to be below expectations. 
  • In FY17, 1Q accounted for 26% of its full-year revenue. However, 1Q18 core net profit at 20% of our full-year expectation was roughly in line with the historical pattern of FY17 (1Q17: 22% of full-year core net profit).
  • Declared 1 Scts DPS. In a net cash position of S$23.8m at end-1Q18.
  • We are concerned over the 10% y-o-y revenue decline in 1Q which could suggest the start of a slowdown in customer demand for FY18F.
  • Cut Target Price to S$1.21, based on a lower 2.81x P/BV multiple (previously 2.95x).

1Q18 performance aided by component sales and lower tax rate

  • Despite the 10% y-o-y revenue decline, UMS managed to report a 2% y-o-y increase in net profit which represents 20% of our FY18 forecast. 
  • Offsetting the revenue decline was a 12% y-o-y rise in component sales which command higher margin as well a 30% y-o-y decrease in income tax expense as more profits were booked by its Malaysian subsidiary, Ultimate Machining Solutions (M) Sdn Bhd, which enjoys Pioneer Tax incentive status.

Management expects bright prospects for FY18 still

  • UMS remains confident of its prospects in 2018 because of sustained high demand in orders from its key customer. 
  • SEMI (the global industry association serving the manufacturing supply chain for the electronics industry) expects total global fab tool spending to increase 9% y-o-y in 2018F to more than US$62bn followed by another 5% y-o-y growth in 2019F. If this materialises, 2019F would mark the fourth straight year of increased spending.

Other updates

  • UMS will be taking a more active role in its Malaysian associate, AllStar, to enhance the latter’s performance. 
  • The group is also progressing well with its due diligence for the proposed acquisition of a 70% stake in a non-ferrous metal alloys specialist, Starke Singapore Pte Ltd (Starke). This acquisition will strengthen its upstream integration, to reap cost savings and improve gross margin.

Maintain ADD

  • Given the 1Q18 sales decline, trade tensions between the US and China as well as feedback of weaker customer sentiments from our channel checks with industry players, we choose to be cautious and reduce our FY18 revenue forecasts leading to a 13.2% decline in EPS. 
  • Our Target Price falls to S$1.21, based on 2.81x FY18F P/BV (ROE: 20.2%, COE: 7.8%) vs. 2.95x previously. Nonetheless, we maintain our ADD call. 
  • Potential re-rating catalysts are better-than-expected order momentum from its major customer.

Key risk

  • Key downside risk is unexpected pull-back in orders by its major customer. 
  • FY18-20F dividend yield of 5.8% remains attractive.

William TNG CFA CGS-CIMB | 2018-05-14
SGX Stock Analyst Report ADD Maintain ADD 1.21 Down 1.310