UMS Holdings

[mrEngineer]

Interesting development on sole sourcing.

Your question is referring to UMS or UMC? UMC is also a large foundry player in taiwan

[Nick]

North American Semiconductor Equipment Industry Posts January 2013 Book-to-Bill Ratio of 1.14

http://www.semi.org/en/node/44961 [SEMI Press Release]

The market continues to recover from its October lows. It has not exceeded 1.0 (sign on growth) since May 2012.

(Vested)

[l0nEr]

Earnings is out!
• Despite challenging conditions, UMS FY2012 revenue remained stable at S$113.2 million (FY2011: S$114.4 million) and its FY2012 net profit was S$17.0 million as compared to S$27.6 million in FY2011
• Free cash flow of S$29.3 million was generated in FY2012
• Outlook to improve as key customer expects better performance in the coming months and is optimistic for the year of 2013, where increasing demand of mobile products will drive investment in semiconductor equipment

UMS recorded a lower net profit attributable to equity holders of S$1.2 million in 4Q2012, representing a 79% decrease from S$5.7 million in 4Q2011

However, maintains final dividend of 2 cents ... bringing total dividends to 5 cents (or 10.8% dividend yield)
The dividend represents a payout ratio of 101%, but 55.4% of the operating cash flow.
Although they didnt buy much PPE this year, they spent quite a big sum buying some subsidiaries, which honestly i still see no use or returns from it (hopefully someone would question them on it).

Q4 earnings looks rather disappointing honestly, they had to make discounts to push sales.
However, the outlook seems rather upbeat as with Applied Materials.

Any comments???

[Nick]

1) The latest result had met my expectations - I was expecting $18 - 19 million in semiconductor revenue based on the output from my regression model (plot of semi revenue against 3M booking orders from SEMI). The FCF generated was solid and can easily finance the dividend payout. Net cash of $15 million despite acquiring IMT for $28 million this year. FY 2012 was a year of two halves with strong 1H and weak 2H which highlights how volatile the industry is. It must not be confused with a yield play.

2) No figures given on the IMT M&A - the Annual Report should contain data. It is not healthy that they are failing to disclose the performance of this asset. Fortunately, there was no impairment of goodwill so perhaps it has been performing well and could very well be the reason why this year profits weren't as bad as it could have been.

3) The booking orders has surged since Nov 2012 and I expect 1H 2013 to be a strong half with semiconductor revenue exceeding the average quarter mark of $25 million and possibly hitting the good quarter $30 million mark if the uptrend in the equipment market continues to build up.

4) The fall in gross margin in 4Q especially with the discount giving to the major customer is rather alarming - is this a temporary blip or a sign of the start of margin squeeze going forward ?

5) The CEM division continues to underperform with decline in revenue and EBITDA despite the Management promises of improvements in the long run. I suspect M&A is required to rejuvenate this small division.

6) Overall pleased with the dividend which stands at 100% earnings payout and 60% FCF payout. I wonder has the market priced this in already together with positive sentiments in 1H 2013 ?

(Vested)

[jim_city]

I wonder has the market priced this in already together with positive sentiments in 1H 2013 ?

I was also thinking the same thing when I was driving home... Has the market priced in the lower profits? If not, would I buy more if the share price drops further?

AMAT seems to be giving all the right signals but can't really tell how much of that good cheer will trickle down to UMS...

There are just too many conflicting news about this industry everyday... One day it's at its cyclical trough and is poised for recovery and another day it's dead again..

Let's just hope that FY2013 will be a good year for the industry and for UMS!

Vested

[Drizzt]

i think there are some real questions to be asked about giving discounts to secure a 5 year extension with AMAT. i wonder if that is a permanent thing.

[jim_city]

i think there are some real questions to be asked about giving discounts to secure a 5 year extension with AMAT. i wonder if that is a permanent thing.

Agreed. If you compare year on year results, revenue has dropped by only 1% and appears that they have managed to reduce most of their operating expenses year on year..

So what caused the 40% or 12.6 million drop in NPBT?

I think broadly put, the decline in profit are due to the following reasons:
- Material Costs has gone up by 6.74 million (on the back of 1% decline in revenue). This might mean that their margins are much lower now or part of it could also be due to the discounts givn to a "key customer".

- FOREX loss of 1.2 million due to depreciation of USD. I would assume most of their sales and purchases would be in USD; maybe it would make more sense for them to change their functional currency to USD? Or could there be a weakness in their hedging policy?

- Increased impairment of inventories by 0.7 million. As a newly vested shareholder, I do wonder why is there such significant impairment of inventory year on year? Is this an industry norm where usability of inventories expire very quickly?

- Absence of disposal gains from sale of factory buildings amounting to 3.5 million.

After taking out the extraordinary items (i.e. the property disposal), it is evident that their gross margins have been depressed significantly. It might be a problem if this is permanent. Or it might also be their strategy to grow sufficient revenue to cover the depressed margins and more?

After typing this out, I guess there are some positives and negativesmoving forward:

The positives:
- Lower operating costs after moving to penang
- AMAT outlook seems positive
- I am not sure of this, but I think there should be increased production capacity as well.

The negatives:
- Potential high CAPEX? It has been 3 years since the last major CAPEX investment
- Reduced margins/ discounts given to secure contracts

Hmm I did not expect myself to type so much.. Apologies for laying my thoughts out here...

[Drizzt]

a compress margin is indeed worrying. its even worse than lower sales. seems to me this partnership is not a win win like on the surface.

[Boon]

“UMS 4Q2012 gross material margin declined to 41% from 54% in 4Q2011. This decline in margin was mainly due to inventory adjustment made during the quarter as well as UMS extending price discount on some products lines. The price discount was made in return for a 5 year contract extension of the Semicon Integrated System business with a key customer”.

Gross Material Margin = (Revenue – COGS)/Revenue

COGS = (Change in inventory + Raw material purchases and sub-contractors charges)

Using a gross margin of 54.1%, the implied undiscounted revenue for 4Q2012 should be around SGD 27.830 million instead of SGD 21.631 million >> implying a discount of 22%.

See attached excel file.

My take is this must be a one of deal. A permanent discount of 22% would make UMS go under in a very short time.

(Vested)

[a74henry]

Technical charts show weakness for this stock.

Fundamentals remains sound. Lower operating costs from relocation will be a plus.
If MAS maintains the USD/SGD exchange rate band, we will see less of the forex loss.
Where is the disposal gains from sale of factory buildings amounting to 3.5 million in a bullish property market?

NAV $0.53. Based on the MV $0.445, there is safety margin. PE about 9x.

I will accumulate pending management briefing on the company strategic directions and outlook.