UMS Holdings

[Nick]

ADOPTION OF DIVIDEND POLICY

http://umsgroup.listedcompany.com/newsro...436C.1.pdf

Despite paying a quarterly cash dividend of at least 1.0 cents from 2Q 2010, the Management has only recently announced a quarterly dividend policy plan. Unfortunately, my expectation of a firm absolute dividend guidance did not materialize. Nonetheless, it looks like a good way to utilize their excellent cash generating ability - previously, they spent heavily in capex expansion in FY 07 - FY 09 and share buy backs (reducing outstanding float from 410 mil shares to 343 mil shares).

However, the Company deals in the cyclical semiconductor industry and is very dependent on its key customer Applied Materials (which accounts for 80% of the revenue and holds 6% stake in UMS). Their forays in the O&G and Aerospace sector in the CEM division has been muted. The founding CEO has also sold shares at around 47 cents in the previous month which may have caused the plunge to 33 cents recently.

(Vested)

[Boon]

The dividend payout for FY 2011 was 6 cents. Based on today's closing price of 38.5 cents, the yield is impressively high at 15.6%. The question is how sustainable is this dividend payout of 6 cents ? Also, wondering why it has taken on 15 million of debt and yet paying out such high dividend.

(Vested)

[Nick]

Hi Boon,

I highly doubt the 6 cents dividend will be maintained in FY 2012 with the $28 million M&A deal partially financed with the $15 million debt facility. But a 4.0 cents dividend is still pretty high yielding. Personally, in a downturn, the dividend will probably be slashed to 1-2 cents depending on expansion plans and how long the recovery will take place. A 6.0 cents dividend was easily sustained in FY 2011 as they managed to generate net operating cash-flow (after deducting interest expense and finance lease payment) of $34.6 million while a 6.0 cents dividend only required $20.6 million payout. Disposal proceeds exceeded capex by $3 million hence net cash rose by $17 million to nearly $38 million with no bank debt. A similar story for FY 2010 where cash-flow could cover the 5 cents dividend while raising their net cash position. Despite the M&A, UMS still remained in a substantial net cash position of $13 million in 1Q 2012 and I suspect the gross debt will be repaid steadily as in previous years.

The key is to recognize that dividend payments will be lumpy since it is a cyclical stock. It will be large in good years and low in bad years. The over-riding principle is to watch the balance sheet and ensure that they can easily survive in any downturn. The good thing is that UMS never burnt cash at all over the past few years - even in loss making year like FY 2009, they generated over $18 million net operating cash-flow (including interest expense and finance lease income of $5 million).

[dzwm87]

Very attractive dividend yield.

Not familiar with UMS but knowing that it engages in semiconductor business, my first key concern will be the huge CAPEX cost which they need to spend to maintain their business.

Won't that be a big hindrance to their business and potentially their free cash generation (i.e. high dividend yield)?

[Nick]

I don't think this is a business with heavy operating capex. It is a supplier of precision components and provides system integration to semiconductor equipment makers (primarily Applied Materials). It also has slight exposure to the O&G division but growth in this segment has been muted. The bulk of the capex was spend in FY 2007 to FY 2009 to expand its capacity by developing its US$25 million 480,000 sqft freehold Penang Facility (completed in late 2009) and its US$20 million leasehold 80,000 sqft Changi Facility (completed in 2008). This resulted in $57.9 million cash out-flow to purchase PPE between FY 2007 to FY 2009. Since then, capex cash-flow was stable at $7.5 million for FY 2010 and FY 2011 where no new acquisitions were made. This is easily covered by its net operating cash-flow (ops cash-flow - interest expense - finance lease expense) of $27 million and $34 million in FY 2010 and FY 2011 respectively.

Hence it could easily finance its 11 cents dividend in FY 2010 and FY 2011 while increasing its net cash from $14.7 million to $37.9 million in the two years (and partially added by $11.1 million disposal proceeds). However, in FY 2012, it made a $28 million acquisition of IMT-USA and IMT-S from a related party and this may reduce its ability to maintain a 6 cents dividend this year despite having net cash of $13.7 million. Based on the current share price of 38 cents, I guess the Market expects a cut in the dividend to 4 - 5 cents this year. I do not expect heavy capex in the coming years unless the Company seeks to expand its capacity by building new plants or acquiring companies locally to expand its services to Applied Materials or regionally to diversify its revenue. This may affect its dividend payout as mentioned in the dividend payout policy announcement. Moreover, in a downturn, it is very likely the dividend will be slashed since UMS operates in a cyclical industry with heavy exposure to Applied Materials.

Nextinsight published a short article on UMS today - http://www.nextinsight.net/index.php/sto...ts-now-say

UOB Kay Hian Report - http://kfc1973-stock.blogspot.com/2012/0...tlook.html

(Vested)

[dzwm87]

There was a huge share sales by its CEO Andy Luong on April 2012 - approx. 3.7% of outstanding shares; close to S$6 million

Though there was an announcement to assure no deterioration in company fundamentals, it was still a huge load. Is the CEO in heavy need of cash?

[KopiKat]

There was a huge share sales by its CEO Andy Luong on April 2012 - approx. 3.7% of outstanding shares; close to S$6 million

Though there was an announcement to assure no deterioration in company fundamentals, it was still a huge load. Is the CEO in heavy need of cash?

He seems to be needing a lot of cash...

He's the sole owner of IMT-S and majority owner of IMT-USA which was acquired by UMS for S$19.8M & S$8.2M respectively.

As for the insider trades, there was also an earlier sell down by Quest World in March from 9%+ to 3.75%. Quest World owned ~30% of IMT-USA and his wife, Lee Luong Sylvia SY is also a director of Quest World. I wonder what's their relationship with Quest World. The other thing is, I don't see Quest World in the Top 20 Shareholder List of AR2011. In the insider transactions, it's stated that it was held under UOBKH nominees but I don't see any that's 9%+.

Anyway, the RPT looks complicated to me.

[Nick]

1) The IMT deal was an IPT deal approved by the EGM. This led to $28 million cash in-flow to the CEO.

2) The CEO sold shares at 47.0 and 47.6 cents and this led to a correction in the share price and it only recovered in the previous week. This isn't the first time the CEO sold shares - previously sold 0.512 million shares in Sept 2008 at 20.0 cents each. I cannot speculate why he sold shares in 2008 or in 2012.

[KopiKat]

Found that Quest World is wholly owned by by Michelle Lee Yuk Lai, a sibling of Lee Luong Sylvia SY. Refer to 5.1.3

[Nick]

Found that Quest World is wholly owned by by Michelle Lee Yuk Lai, a sibling of Lee Luong Sylvia SY. Refer to 5.1.3

Ahh yes. Missed that out.

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1) Quest World and CEO divesting its stake (approx 10% of issued shares) at around 45 - 50 cents in 2012.

2) QW and CEO selling IMT Group to UMS for $28 million cash.

3) UMS paying 11 cents / share dividend in FY 2010 and FY 2011 and proposing quarterly dividends in FY 2012 onwards.

You guys do have legitimate concerns.