• We think UMS could see double-digit y-o-y earnings decline in 2Q19.
• However, 5.6% dividend yield could cap downside.
• World Semiconductor Trade Statistics (WSTS) is hopeful that the semicon industry could recover in 2020.

UMS' 2Q19 Earnings Could Fall by Double-digit Y-o-y

• UMS HOLDINGS LIMITED (SGX:558) reported 1Q19 net profit of S$7.0m. We think 2Q19 net profit could come in around the S$7m region.
• The reason behind our view is that UMS 1Q19 results commentary highlighted that the group's order volumes stayed stable and that it also expects to further benefit from its diversification strategy as it continues to see improved contributions from its associate and subsidiary companies.
• We also note possible minor FX losses as the US$/S$ rate was 1.3530 at end Jun-19 versus 1.3557 at end Mar-19. If 2Q19 earnings come in around S$7m, q-o-q could be flat (to slightly negative if our FX fears materialise) and down 51.7% y-o-y. Note that in 1Q19, net profit fell 38% y-o-y.

Dividend Downside

• We think our current 5 Scts is rate, prospective yields of 5.6% should offer support to the share price. We do be raised in the next 1-2 years with good reason. See UMS' dividend history.
• On 13 May 2019, UMS made a mandatory conditional general offer for shares of JEP HOLDINGS LTD. (SGX:1J4). The offer closed on 24 Jun 2019 with UMS owning 40.5% of JEP versus 27.9% before the offer. Given the positive industry outlook for JEP, we would not rule out the possibility that UMS could be interested in raising its stake in JEP further. This would necessitate a lower dividend payout.

JEP Performance Is Improving

• In FY18, JEP revenue edged up 0.3% y-o-y to S$86m. However, gross profit rose 27% y-o-y to S$12.6m. Gross profit margin improved to 14.7% in FY18 from 11.5% in FY17. JEP also improved its cost management tremendously with operating expenses falling 23% y-o-y. Net profit spiked 1,154.1% y-o-y to S$2.3m.

Maintain REDUCE – Possible Recovery in FY20F

• Our Target Price of S$0.55 is based on 1.24x FY19F P/BV (ROE: 12.5%, COE: 10.3%) vs. 1.37x previously.
• Better-than-momentum from its major customer is our REDUCE call.
• Unexpected pullback in orders by its major customer is a potential de-rating catalyst.
• We note that the World Semiconductor Trade Statistics (WSTS) forecasts that the worldwide semiconductor market could recover in 2020 with 4% growth.

Source: CGS-CIMB Research - 15 Jul 2019