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The following comments and projections (based on average historical figures of the last 4 years) have been made after closer examination of the FY2013 results – as always, an analysis is as good as its underlying assumptions. Comments are most welcomed.

Revenue (SGD ‘000) (Semicon + CEM)
FY2010 = 129,033 (Semicon = 91%)
FY2011 = 114,427 (Semicon = 93%)
FY2012 = 113,212 (Semicon = 95%)
FY2013 = 120,486 (Semicon = 98%) ; (4Q2013 = 34,445 = 28.6% of FY2013)
4-Y-AVG = 119,290 ( 4-year-average)

Revenue (SGD ‘000) (Semicon only)
FY2010 = 117,500 ( 1.7% of SSG revenue of USD 5.304 billion)
FY2011 = 106,700 ( 1.5% of SSG revenue of USD 5.415 billion)
FY2012 = 107,200 ( 1.6% of SSG revenue of USD 5,536 billion)
FY2013 = 119,200 ( 1.9% of SSG revenue of USD 4,775 billion); (yearly semicon revenue at historical 4-year-high)

GPM (Gross Profit Margin)
FY2010 = 56.0%
FY2011 = 55.8%
FY2012 = 49.3%
FY2013 = 53.9% (4Q2013 = 62.5% , Highest quarterly GPM in the last 4 years, see attached excel file)
4-Y-Avg = 54%

NPM (Net Profit Margin)
FY2010 = 22.3%
FY2011 = 24.2%
FY2012 = 15.0%
FY2013 = 24.0% (4Q2013 = 31.9%, Highest quarterly NPM in the last 4 years, see historical excel file)
4-Y-AVG = 21.4%

Operating cash flows before working capital changes : Approximately equals EBITDA (SGD’000)
FY2010 = 48,791
FY2011 = 38,686
FY2012 = 33,603
FY2013 = 40,296 (4Q2013 = 14,492, Second Highest quarterly EBITDA in the last 4 years; = 36% of FY2013, see attached excel file)
4-Y-AVG = 40,344 (4-year-Average)

EBITDA Margin (EBITDA / Revenue)
FY2010 = 37.8%
FY2011 = 33.8%
FY2012 = 29.7%
FY2013 = 33.4% (4Q2013 = 42.1%, Highest quarterly EBITDA Margin in the last 4 years, see attached excel file)
4-Y-AVG = 33.8%

Tax Paid (SGD’000):
FY2010 = 4,544
FY2011 = 3,683
FY2012 = 1,687
FY2013 = 3,832
4-Y-AVG = 3,437 ( 4-year-average)

Change in working capital (SGD’000):
FY2010 = -17,258
FY2011 = + 5,231
FY2012 = + 2,273
FY2013 = - 10,262
4-Y-AVG = - 5,004 (4-year-average)

Capex in PPE (SGD’000):
FY2010 = 7,621
FY2011 = 7,481
FY2012 = 1,994
FY2013 = 1,747
4-Y-AVG = 4,711 (4-year-average)

Comments:
1) Revenue contribution from CEM has been decreasing as a percentage of total revenue. Customer concentration risk (One Industry, one customer) is increasing
2) Semicon revenue as % of SSG revenue is trending up especially in 4Q2013/FY2013, this could be attributed to technology trends are playing to AMAT’s strengths in precision materials engineering, with FinFET and 3D-NAND being the way forward, more PVD process steps are needed – more Endura are needed.
3) I do agree with Nick, relying on net profit margin alone to gauge profitability does not always provide a clear picture, as the margin ratio never offer perfect information – they are only as good as the quality and accuracy of the input data. Since, UMS does “tweak” non-cash (expense/gain) items such as depreciation, FX gain/loss, inventories impairment etc to reduce/boost net profit - a better profitibility margin measure would be the EBITDA margin, which surprisingly as in the case of UMS, has high correlation with NPM - despite of “tweaking”, high NPM does correlate to high EBITDA margin.
4) For the purpose of computing EBITDA margin, on closer examination, in the case of UMS, EBITDA could be approximated by using Operating Cash Flow before working capital changes (OCFBWCC)
5) With no debt and assuming no more borrowing,
FCF (available to Equity) = OCFBWCC (or EBITDA) – change in working capital – capex - tax
Moving forwards, projected FCF (available to Equity) , based on AVERAGE historical figures over the last 4 years = 40,344 – 5,004 – 4,711 – 3,437 = 27,192 = SGD 7.9 cents per share, which looks pretty good on 4-year-historical-average-basis. On yearly basis, Revenue and EBITDA Margin over the last 4 years seemed more stable and predictable, as compared to Changes in Working Capital and Capex in PPE - which varied widely on yearly basis.
6) Major potential upside risks : more jobs given to UMS from AMAT (with or without TEL); higher demand for PVD related equipment (Endura)
7) Major potential downside risk : Manufacturing contract not renewed by AMAT

(Vested)

Boon.
As you seem to be all over this company, do you have any views on the CEO's sale of shares ? He still retains a substantial stake but the sale is nevertheless worrying when otherwise the outlook for the company looks good ?

Hi Boon,

Thanks for the detailed analysis. Pretty spot on there mate. But perhaps, we should bear in mind that FY 2012 and FY 2013 benefited from a full year contribution from the $28 million acquisition of the IMT Group (which contributed $6 million profits in FY 2012). Hence, if we stripped out IMT Group contribution in the recent years results, I don't think it would have surpassed FY 2010 numbers. It also highlights how strong FY 2010 was for the sector as whole. What this means is that if the upcycle continues as it is, we could see numbers greatly surpassing that of FY 2010 mainly due to the incremental contributions from the IMT Group. Yet, in the past few years, we tend to have strong and weak half years so we should temper our expectations in case of a weak 2H 2014.

Hi GreedandFear,

CEO been selling his stakes since 2012. The first time he did, it caused a major correction to the share price (which was when it piqued my interest initially). Subsequent sales didn't cause much impact as the 2012 ones. Personally, I suspect he is just cashing out a little each year for his own personal liquidity. There are better ways to sell as a block if he was seeking to exit ie placement to institutions. Nevertheless, it is something to keep an eye out for.

(Vested)

IMO it is a little disheartening to see the ceo himself not seeing value in his own company. Instead of share buybacks, we see him constantly reducing his stakes, cashing in on the profits.

(Vested)

SG Value Investor
http://www.sgvalueinvestor.wordpress.com

there is also a question of how long they can go on like this without more capex since Andy indicated they dont need too much capex for an extended amount of time.

what happens when the CEO fully sells out his stakes? (owning 0% of the company)

UMS Holdings Ltd
Record 2013

UMSH SP / UMSH.SI | ADD - Maintained | S$0.65 - TP: S$0.80
Mkt.Cap: US$176.10m | Avg.Daily Vol: US$0.32m | Free Float: 67.90%
Semiconductor | Author(s): William TNG, CFA +65 6210 8676,

▊ UMS's FY13 core net profit was 9% above consensus and 15% above our forecasts. While the full-year profit growth of 70% yoy was eye-popping, the icing on the cake was the 2 Scts ordinary DPS and 1.5 Scts special DPS. This brings its FY13 DPS to a record 6.5 Scts. Given the stronger earnings outlook, we raise our FY14-15 core EPS forecasts by 20% on the back of higher sales and margin assumptions. We also introduce our FY16 forecasts. We raise our target price to S$0.80, based on 1.38x CY14 P/BV (average P/BV of the past two earnings recovery cycle) and maintain our Add rating. Potential catalysts are: 1) higher-than-expected DPS payout, and 2) possible new order wins.

Ends FY13 with a bang!
UMS ended 4Q13 with a record S$11.0m profit, its highest quarterly profit since FY11. This was driven by the strong recovery in the semiconductor industry after the breather experienced in 3Q13. Gross profit margin also recovered back to the 47% range experienced in a good year. To cap the record performance, UMS proposed a final DPS of 2 Scts and a special DPS of 1.5 Scts. The company remains in a net cash position.

Expect a strong 1H14 at least
FY14 is again expected to be a good year, with industry forecaster SEMI predicting that semiconductor equipment sales will expand by 23.2% in CY14 followed by 2.4% in CY15. Another forecaster, Gartner, sees semiconductor capital spending expanding 14.1% in CY14 and 13.8% in CY15. Based on the order forecast from its key customer Applied Materials, UMS believes the outlook for 1H14 remains strong.

Maintain Add
Factoring in the latest outlook, we raise our core EPS forecasts by 20% for FY14-15. The focus for UMS, however, is its dividends. If we are right that FY14 will be another record, we could possibly see full-year DPS of 7 Scts or 11% yield. Major shareholder Andy Luong continued to sell some of his shares as part of his wealth planning process but the share sales appear to have halted for the moment. The cyclical nature of the industry remains and investors still need to be wary that 2H14 may not shape up as firmly from the overflow of the strong momentum into the first half.

https://brokingrfs.cimb.com/_UMUM14SMfRS...rTOaw1.pdf [Report]

(Vested)

Hi Nick，

I totally agree with you that FY2010 result was the best in the last 4 years. Its EBITDA (SGD 48.791 million) and EBITDA Margin (37.8%) were the highest among the last 4 years. No doubt, FY2013 had the highest semicon revenue in the last 4 years, even without stripping IMT group contribution from it, FY2013 result still had not surpassed that of FY2010, measuring by EBITDA and EBITDA Margin.

As you have said, If current momentum and upcycle continues, we could see numbers greatly surpassing that of FY2010 – even if it happens, it would still be hard to segregate and pin-point accurately how much of it would be due to incremental contributions from the IMT Group - as in most M&A cases, it is hard to quantify the post M&A synergy or benefits.

IMO, the key dominant factor in determining profitability (in particular EBITDA and EBITDA Margin, hence FCF) is driven more by the Fixed Cost/Variable Cost Structure of UMS, which are more Revenue dependent. In 2010, there were 3 quarters (2Q,3Q and 4Q) with revenues above SGD 33 million ( around SGD 33 to 35 million), whereas in 2011, 2012 and 2013, they each had only 2 quarters of revenues above SGD 30 million. I think to beat the performance of 2010, revenue for each of the 4 quarters in a year has to be above around SGD 33 million. Have to wait and see if this would happen this year
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Hi GreedandFear,

1) In general, I tend to share Nick’s view on the CEO’s sale of shares.
2) Whenever a substantial insider shareholder reduces his stake in the company, it would cause concerns among shareholders – it is a legitimate concern as to his “true rational” for doing so and for which only he has the answer – I suggest this concern be brought up to him during the coming AGM.
3) That said, to me and to many shareholders, the biggest concern is the renewal of contract manufacturing right for another 5 years at the end of 2017 to 2022. If shareholders could have certainty of enjoying FCF generated by UMS for anoyher 5 years up to 2022 – then the selling of share by the CEO should not be an issue at all, IMO.
4) As I have mentioned earlier, if the merger of AMAT + TEL materialize, it is in their game plan to shift more manufacturing jobs to Singapore (to reap the overall tax benefits). If this happens and more jobs are given to UMS, it would be an indication that manufacturing contract would be highly likely to be renewed at expiry in 2017. Have to wait and see how things unfold this year !
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A fellow buddy wrote to me via private message asking me should the Change in Working Capital in my earlier post be “+ 5004” or “- 5004”? For the benefits of other buddies, it would address the issue here.

In this instant, negative value in Change in Working Capital means more Cash has been deployed to be used as Working Capital – hence less FCF is available to Equity. And vice- versa

(Vested)

Fab Equipment Spending to Increase 20-30 Percent in 2014


SAN JOSE, Calif. — March 5, 2014 — The release today of the SEMI World Fab Forecast update reveals a 20 to 30 percent projected increase in semiconductor fab equipment spending in 2014. The uptick to 30 percent depends on specific fab projects in the Europe/Mideast and Asia regions, as detailed in the report. Figure 1 shows Total Fab Equipment Spending versus Installed Capacity without Discretes. For 2014, the report identified over 190 fab projects in 2014 spending on construction and/or equipment and over such 250 projects in 2015 (including Discretes, LED, Analog and Logic fabs)..................

http://www.semi.org/en/node/49131?id=highlights

(Vested)

10 IC Product Segments to Exceed Total IC Market Growth in 2014
Tablet and cellphone processors, NAND flash and DRAM among fastest-growing categories

RESEARCH BULLETIN
MARCH 6, 2014
BY IC INSIGHTS

IC Insights’ March Update to the 2014 McClean Report (released later this month) provides updated forecasts for 33 major IC product categories through 2018.

The complete list of all 33 major IC product categories ranked by forecast growth rate for 2014 is shown in Figure 1. Ten product categories, led by Tablet MPUs, DRAM, and Cellphone Application MPUs, are forecast to exceed the 7% growth rate forecast for the total IC market this year, with seven of the ten categories forecast to enjoy double-digit growth.

The number of IC product categories with positive growth in 2014 is expected to increase to 19 from 15 in 2013. Consumer-driven mobile media devices, particularly smartphones and tablet computers, are forecast to keep the Tablet MPU (35%) and Cellphone Application MPU (19%) segments at or near the top of the growth list for the fourth consecutive year. Other IC categories that support mobile systems including NAND flash (12%) and Display Drivers (10%) are expected to enjoy better-than-industry-average growth in 2014, as well. In 2013, the volatile DRAM market reappeared among the top-growing IC markets with 32% growth due to a big jump in the DRAM average selling price (ASP). DRAM average selling prices are forecast to show another big increase again in this year, propelling the DRAM market to a 23% increase, the second-fastest growing IC product segment in 2014, according to the forecast.

Demand for medical/health electronics systems and the growth in connectivity using the Internet will help the markets for Industrial/Other Application-Specific Analog and 32-bit MCU devices outpace total IC market growth in 2014. Also, the “intelligent” car is another hot market for 32-bit MCUs, which are incorporated into driver information systems, throttle control, and semi-autonomous driving features such as self-parking, advanced cruise controls, and collision-avoidance systems. In the next few years, complex 32-bit MCUs are expected to account for over 25% of the processing power in vehicles.

In a world that is increasingly wireless, the Wired Comm—Special Purpose Logic/MPR is forecast to grow 8%. All wireless traffic eventually goes through high-speed cable transmission "backbone" networks. Communications are routed over long distance via optical cable before getting to the cellular network on ....................................................................................................

http://www.icinsights.com/data/articles/...ts/655.pdf

(vested)