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 UMS Holdings - Returning to Higher Dividend Payouts

    UMS's 1Q20 net profit 7% above our expectations due to better associate performance and foreign exchange gain.
    Positive dividend surprise with 1Q20 DPS of 1.0 Scts vs. 0.5 Scts in 1Q19.
    Reiterate ADD call with a slightly higher Target Price of S$0.96.

1Q20 Better Than Expected

    UMS Holdings (SGX:558)'s 1Q20 revenue grew 22% y-o-y and was in line with our expectations.
    Associate profit grew 86% y-o-y to S$0.9m, mainly due to contribution from JEP Holdings (SGX:1J4).

Positive Dividend Surprise

    We were pleasantly surprised by UMS's decision to revert to its historical norm of 1 Scts quarterly DPS (1Q19: 0.5 Scts). Given the challenging outlook faced by the aviation industry, we now assume UMS will slow its investment into the aviation industry. Hence, we now assume 2Q20F and 3Q20F DPS will revert back to 1 Scts (previous forecast at 0.5 Scts) while 4Q20F DPS is maintained at 2.5 Scts for the moment.

Q-o-q Growth If Production Can Catch Up

    UMS's Penang plant stopped work temporarily from 18 Mar to 6 Apr 2020 due to the movement control order in Malaysia. The plant resumed normal operations on 29 Apr. We believe the company did not face order cancellations. Hence, if production catches up in 2Q20F, q-o-q profit growth remains a possibility.

Possible Weakness in 2H20F

    Gartner Inc on 9 Apr 2020 forecasted the global semiconductor revenue to decline 0.9% in 2020F; this is down from the 12.5% growth it had forecasted for the year last quarter. Supply chain disruptions, caused by the outbreak and tough government measures to contain the contagion, have also weighed on the industry.
    UMS is addressing these challenges by sharpening its production efficiencies and strengthening its supply networks.

Reiterate ADD. Slightly Higher Target Price of S$0.96

    We raise FY20F EPS by 2.6% to factor in the foreign exchange gains. Our Gordon Growth P/BV multiple rises to 2.02x (previously 1.93x). Our Target Price is raised slightly to S$0.96 from S$0.94 previously.
    UMS has a net cash balance sheet and dividend yield of 6.9%.
    Key potential re-rating catalyst is stronger-than-expected recovery for the semicon industry.
    Key downside risk is disruption to the supply chain if the Covid-19 outbreak worsens.

Source: CGS-CIMB Research - 12 May 2020

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