UMS Holdings

[Nick]

UMS RECORDS NET PROFIT OF S$7.6 MILLION FOR 2Q2012 AND PROPOSES DIVIDEND OF 1.00 SINGAPORE CENT

http://info.sgx.com/webcoranncatth.nsf/V...40029CAA8/$file/UMS-Results-Announcement-Q2FY2012.pdf?openelement [SGX Announcement]

http://info.sgx.com/webcoranncatth.nsf/V...40029CAA8/$file/UMS-PressRelease-Q2FY2012.pdf?openelement [Press Release]

UMS has reported fairly stable earnings in 1H 2012 due to the slight recovery in semiconductor capex spending over the past 9 months. However, in light of growing economic weakness in the West and potential China slow-down, Applied Materials have revised their outlook downwards and this will impact UMS revenue and profitability in 2H 2012. During this period, UMS intends to continue its transfer of operations to its Penang facility to tap on lower operating cost and its pioneer tax benefits.

I remain impressed with UMS cash generating ability and it continues to remain in a net cash position despite boosting its dividend payout and acquiring IMT Group in 1Q 2012. A lot has been mentioned about semiconductor companies being poor cash earnings in general however I would like to think that UMS has a niche service and also an excellent partnership with the market leader. A quick look at its cummulative cash-flow profile over the past 7 years shows strong cash earning is typical within UMS.

Cummulative Cash-Flow from FY 2005 to 1H 2012

Net Ops Cash-Flow: $194.1 million (Ops Cash - Net Interest Exp - Finance Lease)
Disposal Proceeds: $40.4 million
Total: $234.5 million

Acquisitions + Capex: $121.8 million
Net Debt Repaid: $5.5 million
Net Shares Repurchased: $13.5 million
Dividends Paid: $64.5 million
Total: $205.3 million

I do not dispute that the semiconductor or the airline industry is inherently high capex driven. However, there are small / med size niche players that thrive inside and generate substantial cash-flow from the services they provide to a few giants. Within the airline industry, SIA is certainly a giant and its profits is very volatile yet there is a certain SIAEC providing a very niche service (through itself and its JVs) generating substantial cash-flow annually. I am not equating UMS (or other semiconductor service provider) with a blue chip like SIAEC but just highlighting that even the bleakest of industry would contain a few niche players with pretty decent business. Naturally, my understanding of UMS might be flawed and I may have over-estimated its 'niche' or its ability to survive a sustained downturn in the semiconductor industry.

Going forward, I expect UMS 2H results to be weaker unless Applied Materials enjoy an uptick in orders in 4Q 2012. If profits are adversely affected, the usual 1.0 cents quarterly dividend may be slashed. The CEM division registered strong quarterly growth (albeit a small base). This division was meant to diversify UMS reliance on semiconductor operations years ago. I am not sure whether future plans will succeed - we have to see how it performs in 2H 2012 especially with the expiry of an exclusive contract with an O&G player recently. The drop in US revenue is expected as Applied Materials is outsourcing towards Asia hence the rise in Singapore revenue. There is no mention about the performances of the recently acquired IMT Group and its contribution to the bottom-line. If this acquisition fails to do well, UMS might be forced to impair its goodwill on the balance sheet.

UMS closed at 39.0 cents and its 2Q 2012 dividend of 1.0 cents will be paid on 31 Oct 2012.

Boon - would value your opinion on their prospects in 2H 2012 and beyond. Thanks !

(Vested)