UMS Integration

[Nick]

Results Review, 1 March 2014
UMS (UMSH SP) Buy (Maintained)
Technology - Semiconductors Target Price: SGD0.88
Market Cap: USD178m Price: SGD0.66

UMS’s 4Q13 results topped our raised expectations, with SGD11.0m
profits (+805.8% y-o-y) on the back of SGD34.5m revenue (+59.3% y-oy).
Going forward, FY14 looks to be a bright year for the semiconductor
industry. Trading at a 7.2x FY14 P/E, UMS offers an extremely attractive
forward yield of 10.7%. Maintain BUY, with our DCF-based TP raised to
SGD0.88 (WACC: 12.4%, terminal growth: 0%).

 The best results ever. UMS’ FY13 SGD28.9m profit (+69.9% y-o-y) and
SGD120.5m revenue (+6.4% y-o-y) are the best ever in its history.
These were attributed to an extremely strong 4Q13, where profit grew
eight-fold y-o-y. Driven by a better product mix and inventory provision,
UMS’ gross margins improved 22bps y-o-y in 4Q13. This was because
of UMS’ high fixed cost and low variable cost structure, where an
increase in revenue often leads to a leap in profits.

 Bright year ahead amid semiconductor recovery. In line with
Gartner’s estimates of a recovery in 2014, the global semiconductor
equipment industry resumed growth and foundries accelerated their
capital expenditure programmes. Semiconductor Equipment and
Materials International (SEMI) forecasted that semiconductor equipment
sales will grow 23.2% y-o-y in 2014, and January’s book-to-bill ratio of
1.04 seems to have confirmed it. Management also appears confident on
1H14 outlook and foresees strong demand for semiconductor equipment
and a ramp-up in orders from Applied Materials (AMAT US, NR), which
should lead to an inventory upswing.

 Dividend trumps expectations. Exceeding our raised expectations,
UMS will pay a final dividend of SGD0.035 per share, bringing full-year
dividends to SGD0.065 per share and a yield of around 10%. Cash flow
remained healthy, though slightly lower due to increased working capital
caused by higher business volume. Given its healthy cash flow and
increased profitability, we expect FY14 dividends to hit SGD0.07 or a
10.7% yield. As UMS pays quarterly dividends, this makes it an attractive
dividend proxy to AMAT and the recovering semiconductor industry.

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(Vested)