UMS Holdings Ltd - DBS Research 2019-02-26: Challenging Near Term Outlook

UMS HOLDINGS LIMITED (SGX:558) | SGinvestors.io UMS HOLDINGS LIMITED (SGX:558)

UMS Holdings Ltd - Challenging Near Term Outlook

  • Weaker 2H drags down FY18 results. 
  • Improved margins, forex gain and acquisition gain lead to a slightly better than expected FY18 net earnings. 
  • UMS’s Total DPS for FY18 cut to 4.5 Scts, vs steady 6 Scts in past years. 
  • Maintain FULLY VALUED and Target Price of S$0.55, given the weakening industry fundamentals. 



Weakening industry fundamentals in the near term.

  • The near-term outlook continues to be challenging with the uncertainty in customers’ order flows as a result of the ongoing China-US trade tensions. Key customer Applied Materials is also guiding for weaker outlook.
  • The longer-term outlook however remains upbeat. SEMI expects worldwide sales of new semiconductor manufacturing equipment to grow 20.7% to reach US$71.9bn, an all-time high in 2020, after a projected 4% contraction in 2019. The semiconductor industry is forecast to expand over the long-term, driven by massive growth of interconnected devices, with heavy demand for processing power and storage.
  • Given the weakening industry fundamentals in the near term, we continue to maintain our FULLY VALUED call.


Weaker 2H18, lower dividend.

  • UMS HOLDINGS LIMITED (SGX:558)'s revenue for FY18 was down 21% y-o-y to S$127.9m, due to a weaker second half performance as many semiconductor customers delayed their capital expenditures in response to trade tensions. Improved margins, forex gain and acquisition gain led to a slightly better than expected net earnings. However, we believe that the improvement in margins may not be sustainable as the outlook for semiconductors remains weak.
  • Total DPS was cut to 4.5Scts for FY18, vs 6Scts in the past 5 years.


Where We Differ:

  • We have assumed a lower valuation multiple of 8x (vs larger peers’ 9x) FY19F PE compared to consensus as UMS has higher customer concentration risk vs peers.


Potential Catalysts:

  • Higher demand for semiconductor equipment, client diversification, earnings-accretive M&As.


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’ end-demand could significantly weigh on UMS’s performance.


WHAT’S NEW - Weaker 2H18, lower dividend


Weaker 2H drags down FY18 results.

  • Revenue for FY18 was down 21% y-o-y to S$127.9m, due to a weaker second half performance as many semiconductor customers delayed their capital expenditures in response to trade tensions, especially among leading memory manufacturers including semiconductor fabs in China.
  • 4Q18 saw a 33% and a 39% y-o-y drop in revenue and net earnings, respectively.

FY18 was slightly better than expected due to improved margins from a better product mix, forex gain and acquisition gain.

  • GP margins for FY18 improved to 60.2% from 54.7% in FY17, due to higher percentage of component sales in the group's product mix. Revenue from component sales increased 5% y-o-y to S$76m while contribution from the semiconductor integrated system sales fell 47% to S$46.6m.
  • UMS also benefitted from a S$0.8m foreign exchange gain (vs a loss of S$3.1m in FY17) due to the appreciation of USD, and a S$1.6m gain on bargain purchase of Starke Singapore.
  • Overall, net earnings of S$43.1m (-17% y-o-y) was 5% above our expectations.

Lower DPS for FY18, in line with guidance.

  • A final DPS of 2Scts was declared. This brings full year DPS to 4.5Scts, vs a steady 6Scts p.a. over the last 5 years, in line with the group’s guidance for a more balanced approach to dividend payments going forward, as it prepares ahead for possible value-accretive M&A opportunities.
  • Cash balance as at 31 December 2018 depleted to S$18.9m, partly due to the investment in JEP HOLDINGS LTD. (SGX:1J4) and acquisition of Starke Singapore.

Near term outlook challenging; long term upbeat

  • The near-term outlook continues to be challenging due to much uncertainty in customers’ order flows as a result of the ongoing China-US trade tensions.

The longer-term outlook however remains upbeat.

  • SEMI expects worldwide sales of new semiconductor manufacturing equipment to grow 20.7% to reach US$71.9bn, an all-time high in 2020, after a 4% contraction in 2019. The semiconductor industry is forecast to expand over the long-term, driven by massive growth of interconnected devices, with heavy demand for processing power and storage.

Maintain FULLY VALUED and Target Price of S$0.55.

  • Given the weakening industry fundamentals, we believe that the higher margins obtained in FY18 may not be sustainable. Thus, we maintain our earnings forecast of a 15% decline in net earnings for FY19F and a flat FY20F.
  • Our Target Price of S$0.55 is still pegged to 8x (vs larger peers’ 9x) FY19F PE. Maintain FULLY VALUED.





Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2019-02-26
SGX Stock Analyst Report FULLY VALUED MAINTAIN FULLY VALUED 0.550 SAME 0.550



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