UMS Holdings - DBS Research 2020-05-13: Outlook Remains Positive


UMS Holdings - Outlook Remains Positive

  • UMS's 1Q20 core earnings in line; higher DPS a positive signal that annual DPS could revert to 6cts.
  • Management cautious in the near term; but long term outlook remains intact.
  • Raised FY20F/FY21F earnings by 20%/14% as growth drivers are intact.
  • Maintain BUY with higher Target Price of S$1.04.

UMS 1Q20 core earnings in line; higher DPS a positive signal

Strong customer demand.

  • UMS Holdings (SGX:558) reported a 52% y-o-y jump in net profit to S$10.7m as revenue grew 22% to S$34.9m in 1QFY20. Compared to 1Q19, the semiconductor business, which accounts for 91% of total revenue, saw a robust improvement in demand as the semiconductor sector only turned around in 2H19.
  • Revenue from its integrated systems business rose 3% to S$12.9m while component sales surged 29% to S$18.8m. Others segment was mainly derived from its subsidiary, Starke Singapore’s material distribution business.

Weaker q-o-q due to COVID-19.

  • However, on a q-o-q basis, revenue dipped 14%. This was mainly a result of the movement control order (MCO) in Malaysia, which led to the group’s Malaysia operations being halted temporarily from 18 March 2020 to 6 April 2020. UMS's Penang facilities have resumed normal operations since 29 April 2020.

Bottom-line boosted by higher net margins and Associates contribution.

  • Gross margin of 53.3% in 1Q20 is comparable to 53.2% in 1Q19. Net margins, however, improved to 30.7% from 24.6% in 1Q19. Bottomline was boosted by higher contributions from its associate company,
  • JEP Holdings (SGX:1J4), and also foreign exchange gain of S$1.5m and S$0.2m from the disposal of fixed assets during the quarter. Excluding these items, core earnings were in line with our expectations.

Proposed higher interim dividend, a positive signal.

  • An interim DPS of 1Sct was declared, vs 0.5Scts in 1Q19. This could be a positive signal that dividend could revert to 6Scts per year, which was the average paid annually from FY13- FY17. DPS was cut to 4.5Scts in FY18 and 4Scts in FY19. See UMS Holdings Dividend History.

Healthy cashflow.

  • UMS continued to generate a healthy free cash flow of S$8.9m, though a dip from S$10.7m in 1Q19. Net cash grew 27% to S$31.8m during the same period.

Management cautious near term due to supply chain disruptions, but longer term demand growth drivers remain intact.

  • Management is cautious on the outlook near term, and expects some challenges due to supply chain disruptions, manpower constraints and other issues from the COVID-19 fallout. However, with the gradual removal of the restrictions globally, the supply chain should be more stable going forward.
  • Furthermore, according to consensus forecasts, key customer Applied Materials (AMAT) is still expected to register earnings growth of 26% in FY20F and 10% in FY21F. This is despite AMAT withdrawing its bullish outlook guidance for 2Q FY October 2020 as a result of the COVID-19 pandemic back in February.
  • Overall, we remain positive on the semiconductor sector, on the back of the acceleration of 5G, artificial intelligence (AI) and other technology-driven developments such as Smart Cities and increased demand for data.

Raised FY2F/FY21F earnings by 20%/14%, Target Price lifted to S$1.04

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2020-05-13
SGX Stock Analyst Report BUY MAINTAIN BUY 1.04 UP 0.770