UMS Holdings Ltd PRICE/TARGET PRICE S$0.17/S$0.35 MKT CAPITALISATION SECTOR

Transcription

1 INITIATING COVERAGE 1 February 2010 CIMB Research Report RECOM BUY UMS Holdings Ltd PRICE/TARGET PRICE S$0.17/S$0.35 MKT CAPITALISATION S$60.2m SINGAPORE Rock and roll time BOARD Mainboard SECTOR Technology UMSH SP William Tng, (65) William.tng@cimb.com Good news not priced in - BUY. We initiate coverage on UMS with a BUY recommendation and a target price of S$0.35 (1x CY10 NTA per share), offering 106% upside potential. Downside is limited as the stock trades at 0.5x C10 P/NTA and offers 5.9% dividend yield with a net cash balance sheet. We believe the good news is not in the price yet as UMS recovery story is still unknown. As our earnings forecasts are vindicated in the coming quarters, the market will play catch-up and rerate the shares given its strong earnings potential in CY10. Investors therefore have a chance to get into this 5.9% dividend yield stock now for further capital gains. Strong turnaround. UMS is in a recovery mode and we expect 4Q09 to see an 800% qoq recovery in net profit. 9M loss stands at S$25.5m due to a S$20.0m write off for goodwill. Excluding the impact from this write off, net loss for the nine months would have been roughly S$5.5m. We expect a strong 1HFY10 and also, given the upturn in the semiconductor industry, there is minimal risk from goodwill write off in FY10. Good chance of cash built up. UMS has completed the bulk of its capex and as such only maintenance capex is likely for the next three years. With consolidated operations in Singapore and Malaysia, efficiencies are set to increase and we believe UMS could see a build up in its cash position. Semiconductor recovery is evident, upside risk to our CY10 forecast. Recently, Elpida reported its first net profit in nine quarters while TSMC posted its biggest profit in two years. TSMC expects its capex to reach US$4.8b, an 80% yoy increase versus its previous record capex of US$3.3b in On the local front, Micro-Mechanics which supplies tooling equipment to the semicon industry reported a quadrupling of net profit for 2QFY10. There could be upside risk to our CY10 forecast. Financial summary FYE Dec F 2010F 2011F Revenue (S$ m) EBITDA (S$ m) EBITDA margins (%) Pretax profit (S$ m) (24.6) Net profit (S$ m) (24.6) EPS (cts) (6.9) EPS growth (%) -49% -85% nm nm -46% P/E (x) nm Gross DPS (cts) Dividend yield (%) P/NTA (x) ROE (%) (14.1) Net cash per share (S cts) P/CF (x) (5.8) EV/EBITDA (x) Source: Company, CIMB-GK estimates Market capitalisation & share price info Market cap S$60.2m Share price perf. (%) 1M 3M 12M 12-mth price range S$0.08/S$0.23 Relative 9.0 (8.4) mth avg daily volume S$0.02m Absolute 2.9 (5.4) 66.7 # of shares (m) Major shareholders % held Est. free float (%) 57 Andy Luong 28.0 Wrts/ICULS o/s (m) - Baring Asia II 13.7 Conv. price (S$) - Quest World Investments 8.2 Source: Company, CIMB-GK Research, Bloomberg

2 Background UMS Holdings Limited provides equipment manufacturing and engineering services to original equipment manufacturers of semiconductors and related products. UMS Holdings Limited was incorporated in Singapore on 17 January Headquartered in Singapore, the Group has production facilities in Singapore, Malaysia as well as offices in California, USA. The Group has two key business segments. 1) The semiconductor segment provides precision machining components and equipment modules for semiconductor equipment manufacturers. 2) The CEM segment is a supplier of assembly and test equipment to hard disk drive manufacturers and also provides its services to the healthcare, defence and other general manufacturing industries. Figure 1: Corporate structure Source: Company

3 Products. UMS provides a wide range of manufacturing services, focusing on, but not limited to the semiconductor industry. 1) Contract Manufacturing Services UMS provides fully integrated solutions for Factory Automation Equipment, Standalone Equipment and Precision Machining Parts. 2) Precision Machining - UMS offers the following precision machining services; Milling, Lathe, Horizontal, Cleaning, Anodizing and Large CMM. 3) Metal Finishing Process The Group is qualified to undertake over 50 processes used in the semiconductor industry, like, Electroless Nickel, Selective Nickel, Anodizing, Plating, E-Polish, E-Beam, Chemical Cleaning and Parts Refurbishment. 4) Aerospace and Oil & Gas products - UMS services these markets through UMS Aerospace, a wholly owned subsidiary, specializing the precision machining of hard material for use in structural products. Production capacity. The manufacture of high volume, lower value added products have been transferred from China to the Group s new 480,000 sq ft complex in Penang, Malaysia. R&D, engineering, and other high value-added processes will continue to be done in Singapore. The Group has also completed a US$20m, 80,000 sq ft facility at Changni North which targets the Oil and Gas industry. The facility is fully booked for the next 6 months. Competitors. In this space, companies that are capable of providing what UMS can offer are Taiwan listed Foxsemicon Integrated Tech (3413 TT) and Benchmark Electronic (BHE US), a US listed EMS service provider with system integration capabilities in Asia. Other SGX listed semicon related companies (though not direct competitors) to UMS are Rokko Holdings Ltd (RKKO SP), Micro-Mechanics Holdings Limited (MMH SP) and Frencken Group Limited (FRKN SP). Major customers. UMS main exposure is to Applied Materials, a leading semiconductor equipment manufacturer from the US. Although UMS does have other customers such as Lam Research, we believe that the business model has changed over the years and customers are now looking to work with strong suppliers. This, we believe, is the reason why UMS has been able to build up a strong working partnership with Applied Materials as they are able to meet the latter s requirements and have a strong balance sheet. In fact, its integration facility is near Applied Materials factory in Singapore. Given that orders in this business are lumpy, Applied Materials contribution to UMS varies from period to period. On average, we estimate that at least half of UMS sales could come from Applied Materials and in a strong year, this percentage could rise to as much as 80%. By end 1QCY10, UMS should have completed its last HDD-related order and UMS has no intention to be involved with the HDD equipment business given the tough pricing environment in this business. The new oil and gas related business pertains more to drilling related equipment such as drill bits and is therefore is function of oil price volatility. We understand that UMS will pursue opportunities in the oil and gas industry selectively.

4 Industry outlook Upturn in semiconductor industry. The effects of the global recession which ravaged chip sales and consumer confidence in 4Q08 continued to manifest themselves in 1Q09. Chip sales fell 27% on a qoq basis in 1Q09 as visibility remained low and consumers were stayed fairly cautious. At the beginning of the year, many market researchers were forecasting a severe drop of more than 20% in worldwide semiconductor revenues for 2009 relative to However, the sector came to a turning point rather rapidly in 2009 as Mar registered a modest improvement of 3.3% on a mom basis which suggested that demand had stabilised at that time. Since then, chip sales have been showing growth mom for nine straight months up to the latest available date of Nov 09 as the coordinated efforts of governments worldwide helped to lift the economic gloom. The worst appears to have passed and consumer confidence has returned. Most market researchers have revised their projections to a low-to-mid teens contraction for That said, 2009 stands out as the first time that worldwide chip sales fell for two consecutive years. Figure 2: 2009 monthly chip sales (US$ bn) vs. yoy growth (%) Source: World Semiconductor Trade Statistics (WSTS), Semiconductor Industry Association (SIA), CIMB Research Strong recovery in worldwide semiconductor equipment spending expected. While worldwide semiconductor equipment capex could have ended 2009 down 42.6% yoy, Gartner expects semiconductor equipment spending to increase 45.3% in 2010, up from the 34.3% previously projected in September. In particular, various major semiconductor foundries including TSMC and UMC have also raised their capex projections for next year. Figure 3: Strong projected growth in semiconductor and equipment capex Semiconductor Capital Spending 25, , , , , , Growth (%) Capital Equipment 16, , , , , , Growth (%) Wafer Fab Equipment 12, , , , , , Growth (%) Packaging and Assembly Equipment 2, , , , , , Growth (%) Automated Test Equipment 1, , , , , , Growth (%) Other Spending 8, , , , , , Growth (%) Source: Gartner (December 2009) Recovery at Applied Materials, more cost reduction. Key customer Applied Materials returned to profitability in Q4 led by the semiconductor equipment business. For the full year ended October 25th, the Company reported net sales of US$5.0b and a net loss of US$305m. In FY10, Applied Materials is expecting net sales to grow by more than 30% yoy. At the same time, the Company will continue to consolidate its supply chain and be closer to more of its suppliers. The Company remains committed to reducing its cost structure, spelling further outsourcing opportunities for its key suppliers such as UMS.

5 Company outlook Challenging year, better times ahead. Even with significant restocking, growth in the semiconductor industry is likely to be negative for 2009, according to isuppli. We expect the company to ride through these tough times with its strong balance sheet and working partnership with its key semicon customer. Management has indicated that they are seeing a strong recovery in orders till 1HFY10. Figure 4: Quarterly Revenue and Profit (S$m) Sales (S$ mil) Net Profit (S$ mil) 0.0 (10.0) 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 (20.0) (30.0) Source :Company Diversifying sales exposure. UMS has traditionally relied on the cyclical hard disk and semicon industry to generate profits. To diversify its risk, the Group has ventured into the Aerospace and Oil & Gas sectors, through UMS Aerospace. To some extent, demand from the Oil & Gas sector will help cushion the downturn in its traditional segments. With high oil prices forecasted to remain high, exploration and prospecting activities will increase and provide new opportunities for UMS. Figure 5: Revenue by Segment Contract Equipment Manufacturing Semiconductor Contract Equipment Manufacturing Semiconductor 21% 22% 79% 78% Source :Company Streamlining operations and cutting costs. Management has taken steps to improve operating efficiencies and reduce cost. Production has been consolidated, cumulating with the bulk of the manufacturing being shifted to the Group s new factory in Penang, Malaysia. This rationalization has led to the closure of the Group s plant in China. The new production facility in Malaysia has a greater production capacity, and will allow the Group to expand production once demand recovers. Figure 6: SWOT analysis Strengths Experienced management team Positive cash flow Long standing relationships with key customers Weaknesses Highly cyclical demand Highly dependant on semiconductor demand Opportunities Expansion into Oil & Gas sector Key customer is expanding locally Threats Competitive industry, subject to technological changes Foreign exchange and translation risks Source: CIMB-GK Research

6 Risks Heavy dependence on semicon sector. UMS overall performance is reliant on the semiconductor sector with more than 70% of total revenue coming from the semicon sector. Given the concentrated nature of the semiconductor equipment industry where entry barriers in the form of capital requirements are high, it is difficult for UMS to diversify. However, management is looking to apply its expertise to build up customers from other industries such as the oil and gas sector. Foreign exchange and translation risks. The Group s costs are denominated in SGD, whilst its revenue is predominately denominated in USD. The Group s bottom line will be affected should the exchange rates move against them. As at end FY08, the Group estimated that a 10% strengthening of the Singapore dollar against the US dollar would have a negative S$2.0m impact to the bottom line. Fast changing and competitive industry. The contract manufacturing and semiconductor industry is highly competitive and is subject to rapid changes in technology. The Group thus has to ensure that its capabilities remain technologically current and cost competitive.

7 Financials Strong FY10, but hard to see into FY11. Given the exceptionally weak business environment in FY09, we are projecting a 45% yoy decline in sales. However, with the strong order outlook and comments from key customer Applied material. We believe UMS is headed for a strong recovery that could see sales grow more than 100% yoy in FY10. However, given the cyclical nature of the industry, FY11 outlook is unclear at the moment and we err on the side of caution by imputing a reduction in demand, leading to a 21% yoy sales decline. Figure 7: Sales trend Sales (S$ mil) yoy chg (%) FY07A FY08A FY09F FY10F FY11F (20.0) (40.0) (60.0) Source: CIMB-GK Research, Company But strong balance sheet, experienced management will mitigate the downside. If we are right and sales enter a down cycle again in FY11, shareholders need not be unduly worried as the Company is run by an experienced management team and the balance sheet is strong. We are projecting that net cash per share will grow from S$0.015 in FY09 to S$0.128 in FY11 as long as we believe that even in a downturn in FY11, UMS will still remain profitable. Note that the bulk of its capex has been completed and as such, there will be no major drain on its cashflow for at least the next three years. At the same time, the consolidation of its manufacturing operations into Malaysia and Singapore will help improve margins via better efficiencies. Figure 8: Growing cash balance 50.0 Net cash (S$ mil) FY07A FY08A FY09F FY10F FY11F Source: CIMB-GK Research, Company. What will UMS do with its cash? Given a growing cash balance, we believe UMS will first look for further vertical integration opportunities to improve its margins. Given that the Group is a heavy user of Aluminum and steel, UMS might consider exploring opportunities in securing a steady supply of such raw materials and reduce its exposure to price fluctuations. Second, if UMS is not able to find a better use for its cash, we believe the Group might increase its dividend payout to shareholders.

8 Valuation and recommendation Re-rating on the back of semicon industry recovery. Following the re-rating of the HDD related stocks on the back of recovery in end demand, we believe undervalued stocks such as UMS will follow the same pattern. Looking at its historical valuation trends, UMS traded at an average forward P/BV of 1.87x for the past nine years and at a forward P/NTA of 2.41x for the same period. We are conservatively pegging our target price at parity to CY10 NTA per share, resulting in a target price of S$0.35 or 106% upside. With support from a projected 5.9% dividend yield, we initiate coverage of UMS with a BUY. Key customers are trading at an average CY10 P/BV of 2.5x while on a historical basis, most of the companies that have some kind of integration capabilities in the semiconductor field have re-rated towards their BVPS, suggesting no reason why UMS should not re-rate towards its CY10 NTA per share. While we can understand the fear over goodwill write-off, bear in mind that this is an unlikely scenario in CY10 given the strong outlook for the semicon industry and at the same time, we have imputed a margin of safety by valuing UMS using NTA per share rather than BVPS. Figure 9: Forward P/BV (x) Ave 1.87x Source: CIMB-GK Research, Company. Figure 10: Forward P/NTA (x) Ave 2.41x Source: CIMB-GK Research, Company. Figure 11: Historical comps of similar companies Mkt Cap Hist Hist Hist Hist Company (US$ mil) P/E (x) P/BV (x) ROE (%) Div yield (%) Frencken Group Ltd FRKN SP Rokko Holdings Ltd RKKO SP Micro-Mechanics Holdings Ltd MMH SP Foxsemicon Integrated Technolo 3413 TT na 7.9 (55.2) na Pentamaster Corp Bhd PENT MK 20.3 na 0.8 (28.2) na Simple average (13.7) 4.9 Source: CIMB-GK Research, Bloomberg

9 Figure 12: Valuation of key customers P/BV ROE Div Ticker Code Mkt Cap Core P/E (x) (x) (%) yield (%) Company (US$ mil) CY2010 CY2011 CY2010 CY2010 CY2010 Applied Materials Inc AMAT US 16, Lam Research Corp LRCX US 4, Average Source: CIMB-GK Research, Bloomberg

10 Management Andy Luong Chief Executive Officer Mr. Andy Luong was appointed as Chief Executive Officer of the Company in January Mr. Luong previously served as Chief Operating Officer of the Company since April As President and Founder of the UMS Group, he has more than 20 years of experience in manufacturing front-end semicon components. He acquired his machining skills through his experience in working in his family s machining business in Vietnam. He emigrated to the USA from Vietnam in 1979 and shortly after college, started a precision machining business called Long s Manufacturing, Inc. Sylvia Sy Lee Luong Chief Operating Officer Mrs. Sylvia Luong was appointed the Group s Chief Operating Officer on 23 November Prior to her appointment, she was the Vice President of Sales & Marketing of the Group. Mrs. Luong is responsible for the daily operations of the Group and managing the Group s marketing and business development efforts. She has more than 20 years of experience in engineering and marketing and began her career with Avantek, Inc. as an engineering assistant before joining Long s Manufacturing, Inc in Goh Kah Ling Vice President, Operations Mr. Goh Kah Ling joined the UMS Group in April 2006 as Vice President of Operations for the semiconductor division. His responsibilities later expanded to cover the entire UMS Group operations. He reports to the Chief Operating Officer. He has extensive experience in electronics, metal, plastic and food manufacturing, and managing offshore operations. He holds a Diploma in Electronics. Loh Meng Chong, Stanley Group Financial Controller Mr. Stanley Loh joined the Company on 5 September 2008 as the Group s Financial Controller. He has more than 17 years of experience in finance, accounting, treasury and auditing. Before joining the Company, he held several controllership positions in trading and manufacturing organizations. A Certified Public Accountant from the Institute of Certified Public Accountants of Singapore since 1995, he is responsible for the overall financial, accounting, tax, treasury, corporate finance and compliance matters of the Group. Source: Company

11 Financial tables PROFIT & LOSS (S$ m, FYE Dec) F 2010F 2011F Revenue Operating expenses (116.0) (77.2) (41.0) (64.7) (53.9) EBITDA Depreciation & amortisation (10.5) (13.0) (14.2) (15.4) (16.6) EBIT (23.6) Net interest & invt income Associates' contribution (0.4) (0.5) (1.0) (1.1) (1.1) Exceptional items Pretax profit (24.6) Tax 0.5 (1.0) - (2.9) (1.6) Minority interests Net profit (24.6) Wt. shares (m) Shares at year-end (m) BALANCE SHEET (S$ m, 31 Dec) F 2010F 2011F Fixed assets Intangible assets Other long-term assets Total non-current assets Cash and equivalents Stocks Trade debtors Other current assets Total current assets Trade creditors Short-term borrowings Other current liabilities Total current liabilities Long-term borrowings Other long-term liabilities Total long-term liabilities Shareholders' funds Minority interests (0.0) (0.0) NTA/share (S$) CASH FLOW (S$ m, FYE Dec) F 2010F 2011F Pretax profit (24.6) Depreciation & non-cash adjustments Working capital changes (0.3) (3.0) (1.2) Cash tax paid (0.7) 0.3 (1.0) - (2.9) Others Cash flow from operations Capex (17.7) (23.3) (12.0) (12.0) (12.0) Net investments & sale of FA (5.3) 11.2 (1.0) (0.5) 2.0 Others Cash flow from investing (22.8) (12.1) (12.9) (12.3) (9.7) Debt raised/(repaid) (7.0) (0.6) (0.5) Equity raised/(repaid) (4.8) (8.8) - (0.4) 0.3 Dividends paid (8.7) (3.6) (1.8) (3.5) (3.5) Cash interest & others (0.4) (0.5) (1.0) (1.1) (1.1) Cash flow from financing (20.8) (2.8) 3.0 (5.7) (4.9) Others 0.2 (1.3) - (0.5) - Change in cash (15.8) (2.4) Change in net cash/(debt) (8.8) (12.4) (1.5) Ending net cash/(debt) KEY RATIOS (FYE Dec) F 2010F 2011F Revenue growth (%) (17.5) (32.4) (44.9) (20.9) EBITDA growth (%) (39.2) (27.3) (35.4) (26.8) Pretax margins (%) nm Net profit margins (%) nm Interest cover (x) nm Effective tax rates (%) (4.6) Net dividend payout (%) nm Debtors turnover (days) Stock turnover (days) Creditors turnover (days) Source: Company, CIMB-GK estimates

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However, the delivery of this research report to any person in the United States of America shall not be deemed a recommendation to effect any transactions in the securities discussed herein or an endorsement of any opinion expressed herein. For further information or to place an order in any of the abovementioned securities please contact a registered representative of CIMB Securities (USA) Inc. Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. CIMB-GK Research is a participant in the SGX Research Incentive Scheme and receives a compensation of S$7,500 per stock per annum covered under the Scheme. RETAIL RESEARCH RECOMMENDATION FRAMEWORK STOCK RECOMMENDATIONS BUY: The stock's total return is expected to be +15% or better over the next three months. HOLD: The stock's total return is expected to range between +15% and -15% over the next three months. SELL: The stock's total return is expected to be -15% or worse over the next three months. CIMB-GK Research Pte Ltd (Co. Reg. No M) SECTOR RECOMMENDATIONS OVERWEIGHT: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of +15% or better over the next three months. NEUTRAL: The industry, as defined by the analyst's coverage universe, has either (i) an equal number of stocks that are expected to have total returns of +15% (or better) or -15% (or worse), or (ii) stocks that are predominantly expected to have total returns that will range from +15% to -15%; both over the next three months. UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of -15% or worse over the next three months.