• 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

Downgrade to HOLD From Add

Source: CGS-CIMB Research - 14 Nov 2018