• We deem FY19 net profit at 97%/96% of our/consensus’ expectations to be in-line.
• Final DPS of 2Scts was in line with our expectations but the 0.5Scts special dividend was a pleasant surprise.
• Covid-19 is a risk and UMS is working closely with its customers to mitigate the impact.
• Upgrade to ADD from Hold on stronger earnings expectations.

FY19 Earnings Deemed In-line

• We deem UMS Holdings (SGX:558)'s FY19 net profit at 97%/96% of our/consensus’ full-year forecasts to be in-line. The recovery in the semicon industry can be seen from the 53% y-o-y increase in sales for UMS’s semicon segment in 4Q19.
• Due to the higher contribution from System Integration sales in 4Q19, the group’s gross material margin fell to 51.1% in 4Q19 versus 60.9% in 4Q18.
• UMS also benefitted from better earnings performance at its associate, JEP Holdings (SGX:1J4).

What Affected 4Q19’s Performance

• In 4Q19, UMS recorded a foreign exchange loss of S$0.7m, an impairment of goodwill of S$1.0m (relating to Kalf Engineering Pte Ltd) and a provision of S$1.1m for inventory obsolescence.
• Kalf Engineering is a 51%-owned subsidiary acquired in Mar 2017 whose main products are electro-chlorination generators which are designed for the electrolysis of seawater or brine into sodium hypochlorite solution, a disinfection solution for water treatment systems in power generation plants and oil & gas or offshore platforms.

Semicon Recovery Expected in 2020F, But Covid-19 Could be a Risk

• UMS believes that the semiconductor industry will see a recovery in 2020. The key risks that could derail the recovery are:
  1. lack of progress in the resolution of the trade issues between the US and China, and
  2. disruption to the global supply chain due to the coronavirus (Covid-19) outbreak.
• UMS is working closely with its customers on mitigation measures to ensure minimal disruptions to its operations from the Covid-19 outbreak.

Upgrade to ADD From Hold

• The good 4Q19 semicon sales performance gave us the confidence to raise our FY20-21F revenue forecasts, leading to a 9-11% increase in our earnings estimates.
• We upgrade our rating to ADD from Hold given our expectations of a stronger earnings recovery in FY20F. Our Target Price of SGD1.08 is based on 2.16x FY20F BVPS (Gordon growth model: ROE 17.6%, cost of equity 6.8%, 3.0% terminal growth). The previous Gordon growth model-derived P/BV was 1.93x. Base case DPS is now assumed to be 4Scts over FY20-22F.
• Re-rating catalyst is stronger-than-expected recovery for the semicon industry, while downside risk is disruption to the supply chain if the Covid-19 outbreak worsens.

Source: CGS-CIMB Research - 25 Feb 2020