UMS reported a stronger 2Q15, with core EPS increasing 12.4% yoy and 26.9% qoq. 1H15 core net profit was broadly in line with our forecast at 54%. Given the stable outlook for semiconductor equipment spending guided by industry forecasters and management, we keep our numbers unchanged and reiterate our Add rating and target price of S$0.63. This is based on 1.38x CY15 P/BV. We continue to like the highly-sustainable base-case DPS of 5 Scts, translating into an attractive FY15-17 dividend yield of 9.8%. Potential catalysts are earnings momentum, new customers and strong cash flow. A key risk is a further sell down by its major shareholder.
UMS observed that business picked up earlier than expected as 2QFY15 revenue grew 8.2% yoy and 13% qoq to S$31m. This was driven by better component sales from the US (+44% yoy) and slight growth in Singapore (+1% yoy). With manufacturing activities concentrated in Penang, the weak ringgit will help lower operating costs. The gross material margin stayed stable at 57%.
2H15 to grow yoy
The Semiconductor Equipment and Materials International (SEMI) trade association forecasts semiconductor equipment spending to grow 11% in 2015 and 5% in 2016 while Gartner expects the same to be flat in 2015. CEO, Andy Luong guides for a possibly stronger 2H15 versus 2H14.
Dividend tradition continues
UMS declared an interim dividend of 1 Sct/share in 2Q15. In 1Q15, the company also declared a 1 Sct DPS. Its balance sheet remains strong, with a net cash position of S$39.6m (no debt) and limited capex. Operating cash flow in 2Q15 was S$13m while free cash flow was S$12.6m. UMS operates in a cyclical industry, relies on one single customer, Applied Materials and has been unable to grow its business beyond this single customer. Despite these, the company has prudently returned excess free cash flow to shareholders rather than undertake M&A for the sake of short-term growth. (Read Report)
Source : CIMB Research