Towards Financial Freedom
UMSH - Dividend Proxy To Looming Sector Revival
In view of the impending recovery of the semiconductor industry, we see UMSH as a proxy to the revival. We like its: i) close partnership with industry leader Applied Materials, ii) stable cash flow that provides attractive sustainable dividends of ~10%, and iii) potential share price jump. We initiate coverage on UMSH with a BUY and TP of SGD0.71, based on a DCF model (WACC: 10.9%, Terminal Growth: 0%).
- Proxy to semiconductor recovery via Applied Materials. A semiconductor industry rebound is on the horizon, as billings had been improving 12.6% on a m-o-m basis. The company has a close-knit partnership with industry market leader Applied Materials, given: i) their ˃20-year relationship, ii) the latter's substantial shareholding in it, and iii) that it is the near-exclusive assembler of the latter's Endura system, which translates into increased orders as demand for the industry giant'sproducts pick up.
- Stable cash flow provides attractive sustainable dividends of ~10%. UMSH boasts a solid track record for generating impressive net operating cash flows. Most notably, even at the height of the 2009 financial crisis, it recorded positive operating cash flow despite suffering a loss in earnings. Factoring in its current financial strength (net cash of SGD26.4m as at end-1QFY13) into consideration, we believe there is no problem for the Group to sustain its generous payout, which translates to an attractive average annual yield of ~10%.
- Potential share price surge. Applied Material's stock price has been steadily trending upwards. Given that UMSH can be considered a proxy bet to the former, and coupled with the industry's positive book-to-bill (BB) ratio, we believe that there is room for the Group's share price to catch up to Applied Material's strong gains and close the gap. (See Figure 10.)
- Risks include: i) too focused on a single customer, ii) limited product offerings, iii) the semiconductor cycle may not play out, and iv) its founder's open market share sale concerns investors.
Source: OSK
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