In 2017, the manufacturing industry alone made up 20% of Singapore’s gross domestic product. The electronics semiconductor sector was one of the driving forces that drives the overall manufacturing industry in 2017. Many companies that operate in the sector reported outstanding performance last year. As a result, many of them enjoyed sharp rallies in their stock prices.
There are about 12 semiconductor companies that listed in Singapore. Among the largest in terms of market capitalisation are UMS Holdings Limited, Micro-Mechanics (Holdings) Limited and AEM Holdings Limited.
1. Stock Symbol
Ticker Symbol: SGX:558
Market Cap: S$ 590.84 million (6 April 2018)
Share Price: S$ 1.10 (6 April 2018)
Industry: Semiconductor Equipment and Materials
2. The Business
UMS Holdings makes high precision front-end semiconductor components for original semiconductor equipment manufacturers and performs complex electromechanical assembly and final testing services. It was incorporated in Singapore on January 17, 2001. UMS Holdings has production facilities in Singapore, Malaysia as well as California and Texas, USA.
UMS Holdings has strong ties with a US-based semiconductor equipment maker, Applied Materials (NASDAQ:AMAT). Applied Materials is a leading company in the semiconductor industry with a market capitalisation of 55.4 billion USD. According to Gartner, Applied Materials alone cornered 21% of the wafer-level manufacturing equipment market share. UMS supplies about 70% of water transfer modules for Endura deposition system, a trademark of Applied Materials.
3. Financial Results
Revenue figures for UMS Holdings were fairly lumpy from 2013 to 2016. The revenue in 2013 was S$120.5 million and dropped to S$ 104.2 million in 2016. For FY 2017, a record revenue and net income were achieved, mainly driven by higher contribution from its component sales. Component sales attributed a higher profit margin for UMS Holdings, compared to system integration sales.
Source: Annual Reports
Gross and Net Margin
UMS Holdings has a high and consistent gross margin, hovering around 54% in the past 5 years. Its profit margin is more volatile compared to the gross margin, with the lowest of 21.7% in 2016 and the highest of 32% in 2017. Overall, the gross and net margin is commensurable with its peers in the same industry.
Source: Annual Reports
Its Return on Equity (ROE) was fluctuating between 11.9% and 17.6% from 2013 to 2016. In 2017, the ROE increased to 24.2% due to improvement in net income from higher component sales. It means that UMS Holdings is getting more efficient at churning out profits using company shareholders’ equity. Although it is a good news for investors, it is important to keep track the figures to see if the high ROE is sustainable in the long run.
Source: Annual Report
UMS Holdings has a strong balance sheet. As at December 2017, UMS Holdings reported a total debt of S$ 22.2 million. With cash and cash equivalence of S$ 59.6 million, it is sitting on a net cash position of S$ 37.4 million. Its debt to equity ratio is around 10.3%. Therefore, we can conclude that the company is conservatively financed under its current management.
UMS Holdings has paid out a total dividend of S$ 0.06 per share in 2017. At a price of S$ 1.10 per share, this translates to a dividend yield of 5.45%, which is attractive compared to most listed companies. The company has been giving a consistent dividend distribution in the past 3 years of S$ 0.06 per share. With a track record of positive free cash flow, I believe that the company could continue paying out dividends in the future.
On 17 Jan 2018, UMS announced that it has purchased a 29.5% stake in SGX-listed JEP Holdings. JEP Holdings is a Singapore-based investment holding company which engaged in the precision engineering segment. It has a long track record as a supplier of aerospace components for the world’s leading aircraft manufacturers. The acquisition of JEP stake could help UMS Holdings to diversify its business segment and hence reduce customer concentration risk.
5. Growth Drivers
UMS Holdings’ future prospect remain bright at the moment. Semiconductor Equipment and Materials International (SEMI) has projected that global sales of semiconductor manufacturing equipment will grow 7.5% in 2018. Applied Materials is also forecasting a double-digit revenue and profit growth in 2018.
UMS Holdings is ready to take on higher volumes as it has increased its capital expenditure for a new plant in 2017. A total of RM80 million was allocated to expand its Penang production facility to cater products mainly for Applied Materials.
Over the medium term, the management remains optimistic towards growth, driven by a new generation of chips design to cater for the Internet of Things (IoT) and Big Data.
Key Client Risk
One of the key risks possess by UMS Holdings is that it has a high portion of revenue attributed to Applied Materials. According to DBS Bank research report, UMS management estimated that between 80% to 90% of its revenues is attributable to Applied Materials. Any disruptions to the relationship or weakness in Applied Materials demand could affect UMS Holdings performance significantly.
However, a good thing is that the management is committed to diversifying its customer base. On 24 February 2017, UMS Holdings entered into a conditional agreement to subscribe to 51% enlarged share capital of Kalf Engineering. Kalf Engineering is a company which provides water and chemical engineering solution for industries such as oil and gas, power generation and chemical industries.
Besides, UMS Holdings has recently signed a memorandum of understanding to acquire 70% stake in non-ferrous metal alloys specialist, Starke Singapore Pte Ltd. The proposed acquisition will be settled in cash. This will be the third acquisition for UMS over the past 12 months. It shows that the management is putting efforts to have alternative revenue streams beyond its traditional semiconductor business.
UMS Holdings is trading at PE of 11.4 and PB of 3.27 as at 6th April 2018. With an attractive dividend yield of 5.45%, it might indicate that the market has a low expectation of the company.
8. Investors Relation
UMS Holdings Limited
23 Changi North Crescent
Changi North Industrial Estate
Tel: (65) 6543 2272
Fax: (65) 6543 0623
9. Major Shareholders (10/November/2017)
- Luong Andy – 20%