UMS Holdings Ltd - CGS-CIMB Research 2018-11-14: The Downcycle Begins


UMS Holdings Ltd - The Downcycle Begins

  • Even though we were bracing for a softer 2H18, 3Q18’s net profit turned out to be a disappointment at just 16% of our previous full-year forecast.
  • Interim DPS was cut to 0.50 Scts versus the usual 1.0 Scts. Cash balance fell to S$20.0m (slight net cash position) at end-Aug 18.
  • We cut our recommendation from Add to HOLD as we monitor the progress in growing earnings given the strategic decision to tilt towards expansion.

3Q18 earnings below expectations

  • UMS' 3Q18 net profit was just 16% of our full-year forecast, a disappointment despite our expectations of a softer 2H18.
  • Revenue fell 26% y-o-y during the quarter while employee expenses rose 23% y-o-y due to the Starke acquisition.
  • Gross material margin was 59% in 3Q18, similar to 3Q17 as higher margin component revenue grew 10% y-o-y.
  • Associate earnings were S$0.4m in 3Q18 compared to a loss of S$91,000 in 2Q18.

Dividend cut a concern

  • In a departure from its established practice of a 1.0 Scts DPS, DPS for 3Q18 was cut by 50% to 0.5 Scts. The reasons for the cut are
    1. UMS share base has expanded via a 1:4 bonus issue in FY14 and FY17, and
    2. UMS is rebalancing its excess capital allocation in favour of further diversification of its business (UMS did 2 acquisitions in FY18).
  • We cut our FY19-20F DPS assumption to 2.5 Scts versus 6.0 Scts previously.

Near-term challenge

  • In the near term, the uncertain global economy is leading to delays in capacity investment and equipment spending. In the mid-to-long term, prospects for global fab construction investment remain robust.
  • SEMI’s World Fab Forecast predicts global fab equipment spending to increase by 88.8% in 8888 to US$88.8bn and by 8.8% to US$88.8b in 8888. Spending drivers include high-performance computing, data storage, artificial intelligence, cloud computing, and autonomous vehicles.

Downgrade to HOLD from Add

  • We cut our FY88-88F core EPS as the impact of the current slowdown becomes more apparent. Dividend yield has always been the key reason to own this stock. With the stronger emphasis on growing the business, we cut our call to a Hold from an Add as we await progress on growing the company.
  • Our ROE-g/COE-g derived P/BV multiple falls to 8.88x (8.88x previously). Target Price based on FY88 BVPS falls to S$8.88.
  • Downside risk is order pullback by its customer.
  • Upside risk is stronger than expected orders from customer.

William TNG CFA CGS-CIMB Research | 2018-11-14
SGX Stock Analyst Report HOLD DOWNGRADE ADD 0.75 DOWN 1.210