• UMS's 2Q19 results within expectations; GP margin fell y-o-y but stable q-o-q.
• 2H19 outlook challenging but order volumes stabilizing, though no clear turnaround sign yet.
• SEMI expects recovery in semiconductor industry in 2020.
• Maintain FULLY VALUED, Target Price raised to S$0.49.

Stabilising Demand in 2H19 But No Clear Turnaround Signal Yet

• Near term, UMS HOLDINGS LIMITED (SGX:558) is seeing stable business orders in 2H19, despite the challenging semiconductor outlook. However, we would prefer to be cautious and maintain our forecasts and FULLY VALUED call for now. Factors to look out for before we turn more positive would be the successful renewal of existing contract with its key customer before the end of this year, and a meaningful pick-up in semiconductor equipment sales.
• Longer term, SEMI expects a rebound in the semiconductor industry in 2020. Semiconductor equipment sales are projected to decline by 18.4% in 2019 from last year’s historic high, and to resume with an 11.6% y-o-y growth in 2020.

Where We Differ

• We have assumed a lower PE of 9x FY20F earnings (vs larger peers’ 11x) compared to consensus as UMS has higher customer concentration risk vs peers.

Potential Catalysts

• Successful renewal of contract with existing key customer, higher demand for semiconductor equipment, client diversification, earnings-accretive M&As.

What's New - 2Q19 Results in Line; Expect Stable Demand in 2H19

2Q19 results within expectations:

• UMS's 2Q19 revenue was down 15% y-o-y to S$30m due to a 25% dip in sales from its semiconductor segment. The decline in semiconductor sales was due to lower semiconductor integrated system sales which fell 19% y-o-y to S$11.9m while component sales saw a 30% drop to S$14.5m. The company’s Singapore sales eased mainly due to weaker demand for semiconductor integrated systems. Revenue from Taiwan and Malaysia fell as a result of lower component sales.
• On a q-o-q basis, the group's semiconductor sales stayed stable, easing just 2%. Overall, revenue for 2Q19 was up by about 4.8%, lifted by the non-semiconductor businesses.

GP margin fell y-o-y but stable q-o-q.

• Gross margin in 2Q19 fell to 53% from 64% in 2Q18 partly due to product mix, with higher contribution from Starke’s material distribution business. On a q-o-q basis, GP margin was stable.
• The group's bottom line, however, was boosted by contributions from associate company JEP Holdings (SGX:1J4), and its subsidiaries - Kalf Engineering and Starke Singapore. Overall, 2Q19 net profit of S$8.1m, which account for 27% of our FY19F forecast, was down 44% y-o-y but improved by 15% from 1Q19.
• For 1H19, revenue and net profit account for 50%/51% of our full-year forecasts; in line.
• An interim DPS of 0.5 Sct was declared, similar to 1Q19 but lower than 2Q18’s 1 Sct.

Healthy cashflow.

• UMS continues to generate healthy cash flow in 2Q19. Net cash from operations surged 208% y-o-y to S$15.5m. The improved cash flow was achieved mainly from running down its inventory and lower capital expenditures. UMS invested S$6.9m to raise its equity stake in JEP Holdings from 29% to 39% in 2Q19. Even after making an additional investment in JEP Holdings and paying dividends of S$10.7m, the group’s net cash rose to S$6.0m as of end- 2Q19, reversing from a net debt of S$1.4m as at end-4Q18.

2H19 outlook for semiconductor remains challenging but order volumes stabilising.

• The second half outlook for the semiconductor business remains challenging, but UMS is currently seeing stable business order volumes from its major customer in the US. Its non-semiconductor businesses, which accounted for 8.9% of 1H19 total revenue, are also making good progress.

SEMI expects recovery in semiconductor industry in 2020.

• According to SEMI, global sales of semiconductor manufacturing equipment by original equipment manufacturers (OEMs) are projected to decline by 18.4% in 2019 from last year’s historic high.
• Growth in equipment sales is expected to resume in 2020, with an 11.6% y-o-y jump on the strength of memory spending and new projects in China, while equipment sales in Japan will surge 46.4%.

Maintain FULLY VALUED, Target Price Raised to S$0.49

• Though UMS is currently seeing stable business orders in 2H19, and SEMI expects a rebound in semiconductor equipment sales in 2020, we would prefer to be cautious and maintain our forecasts and FULLY VALUED call for now. Factors to look out for before we turn more positive would be the successful renewal of existing contract with its key customer and a meaningful pick-up in semiconductor equipment sales.
• Our target price is raised to S$0.49 (previously S$0.45), still pegged to a 20% discount to peers, at a slightly higher 9x PE (vs 8x previously) and rolling over to FY20F earnings.

Source: DBS Research - 16 Aug 2019