UMS Holdings - CGS-CIMB Research 2020-02-25: Earnings Growth Set To Resume In FY20F


UMS Holdings - Earnings Growth Set To Resume In FY20F

  • We deem FY19 net profit at 97%/96% of our/consensus’ expectations to be in-line.
  • Final DPS of 2Scts was in line with our expectations but the 0.5Scts special dividend was a pleasant surprise.
  • Covid-19 is a risk and UMS is working closely with its customers to mitigate the impact.
  • Upgrade to ADD from Hold on stronger earnings expectations.

FY19 earnings deemed in-line

  • We deem UMS Holdings (SGX:558)'s FY19 net profit at 97%/96% of our/consensus’ full-year forecasts to be in-line. The recovery in the semicon industry can be seen from the 53% y-o-y increase in sales for UMS’s semicon segment in 4Q19.
  • Due to the higher contribution from System Integration sales in 4Q19, the group’s gross material margin fell to 51.1% in 4Q19 versus 60.9% in 4Q18.
  • UMS also benefitted from better earnings performance at its associate, JEP Holdings (SGX:1J4).

What affected 4Q19’s performance

  • In 4Q19, UMS recorded a foreign exchange loss of S$0.7m, an impairment of goodwill of S$1.0m (relating to Kalf Engineering Pte Ltd) and a provision of S$1.1m for inventory obsolescence.
  • Kalf Engineering is a 51%-owned subsidiary acquired in Mar 2017 whose main products are electro-chlorination generators which are designed for the electrolysis of seawater or brine into sodium hypochlorite solution, a disinfection solution for water treatment systems in power generation plants and oil & gas or offshore platforms.

Semicon recovery expected in 2020F, but Covid-19 could be a risk

  • UMS believes that the semiconductor industry will see a recovery in 2020. The key risks that could derail the recovery are:
    1. lack of progress in the resolution of the trade issues between the US and China, and
    2. disruption to the global supply chain due to the coronavirus (Covid-19) outbreak.
  • UMS is working closely with its customers on mitigation measures to ensure minimal disruptions to its operations from the Covid-19 outbreak.

Upgrade to ADD from Hold

  • The good 4Q19 semicon sales performance gave us the confidence to raise our FY20-21F revenue forecasts, leading to a 9-11% increase in our earnings estimates.
  • We upgrade our rating to ADD from Hold given our expectations of a stronger earnings recovery in FY20F. Our Target Price is based on 2.16x FY20F BVPS (Gordon growth model: ROE 17.6%, cost of equity 6.8%, 3.0% terminal growth). The previous Gordon growth model-derived P/BV was 1.93x. Base case DPS is now assumed to be 4Scts over FY20-22F. See attached PDF report for details on target price derivation.
  • See UMS Holdings Share Price; UMS Holdings Target Price; UMS Holdings Analyst Reports; UMS Holdings Dividend History; UMS Holdings Announcements; UMS Holdings Latest News.
  • Re-rating catalyst is stronger-than-expected recovery for the semicon industry, while downside risk is disruption to the supply chain if the Covid-19 outbreak worsens.

William TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-02-25
SGX Stock Analyst Report ADD UPGRADE HOLD 1.08 UP 0.960