UMS Holdings (UMSH SP)
Positive earnings outlook with consistent dividend payout
• UMS is trading at 5x 2011 PE, the lowest among peers. Based on consensus estimate, UMS has a 12-month target price of S$1.08 and is set to report earnings growth of 15.8% in 2012 to S$32.0m.
• We view that UMS should be trading at S$0.65/share, pegged to the 3-year historical average PE of 7.0x on consensus EPS of 9.3 cents. This gives us an upside of 69%.
• Positive customer outlook will increase sales. Applied Materials, the main customer and a substantial shareholder of UMS, reported strong results for 2Q12, with orders of US$2.77b and net sales of US$2.54b. According to CEO Mike Splinter, global demand for mobile devices is driving a third consecutive year of strong capital investment by semiconductor customers. For the full year, Applied expects net sales to be at the high end of the range of US$9.1b-9.5b. We believe this is likely to drive demand for UMS’s products.
• New capacity for growth. UMS has over 700,000sf of space in Singapore and Penang, Malaysia to meet new demand. It is running close to 50% utilisation and would be able to ramp up to 100% whenever there are urgent orders. By shifting its production to Penang, UMS also enjoys lower tax rates due to the pioneer tax incentive scheme.
• Earnings are likely to improve for the next two quarters. 1Q12 revenue grew 27% qoq to S$6.0m from S$25.2m in 4Q11, driven by higher demand for chips used in mobile devices while the component business was affected by lower spending by DRAM producers. UMS also recorded an exchange loss of S$1.3m due to the depreciation of the US$. As a result, the group’s net profit only increased 5.5% qoq to S$6.0m in 1Q12 from S$5.7m in 4Q11. However, management highlighted that the semiconductor sector is likely to improve and customers’ order forecasts have also indicated that this momentum is likely to continue into the next six months.
• High dividend payout will support share price. UMS has a history of paying out a large portion of its earnings as dividends. For 2011, the group has proposed a final and special dividend of 3.0 cents, bringing total dividend to 6.0 cents for the year. This is equivalent to a payout ratio of 74.6%, compared with 59.8% in 2010. UMS had also declared a dividend of 1 cent/share for 1Q12, giving investors an annualised dividend yield of 10.5% based on the last traded price.