We like UMS for its high dividend per share (2013 YTD: 3 cents, 2010-12: 5 cents, with a special dividend of 1 cent in 2010-11). If there is a special dividend in FY13 as well, yield will exceed 10% at the current share price.

Net margins already exceed 20% even with low utilisation rate of 60-70%. Higher utilisation on more volume from Applied Materials and new business could boost margins, enhancing cash flow further and its ability to pay dividends.

High single-customer exposure to Applied Materials (80% of sales) is a concern. But UMS is hooked into the right trend, where industry capex is driven by smart mobile devices.

What’s New

We recently visited precision machining company UMS Holdings in Singapore. UMS makes components, sub-systems and full systems for semiconductor equipment, accounting for 95% of revenue. The rest comes from contract manufacturing of components for the oil & gas industry, which includes customers such as Schlumberger and Halliburton. Its biggest customer is Applied Materials (AMAT), which makes systems that perform most of the steps in semiconductor chip fabrication. AMAT is set to consolidate its position as the world’s largest semiconductor equipment maker with the acquisition of the third-largest player, Tokyo Electron.

What’s Our View

UMS’s share price has seen a gradual re-rating in the past few years after it commenced its OEM business with AMAT in 2012 and following the payment of a quarterly dividend since 2010, which has helped allay investor concerns about its heavy reliance on a single customer. 2014 looks set to be a better year and it may reinstate its special dividend as early as 2013. Buying UMS now for the final dividend of 2 cents would give a yield of over 8% (assuming a holding period of five months), with a special dividend of 1 cent potentially beefing up the return to over 12%!  

Source: Maybank Kim Eng Research - 20 Jan 2014