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UMS Holdings: Shift into new industries and cheaper areas of production bode well for this company

Uma Devi
Uma Devi1/17/2020 07:00 AM GMT+08  • 3 min read
UMS Holdings: Shift into new industries and cheaper areas of production bode well for this company
SINGAPORE (Jan 17): UMS Holdings has gained from the turnaround in the semiconductor industry. In its most recent 3Q ended September 2019, UMS reported earnings of $9.2 million, a 21% improvement from the previous year. Revenue, too, increased 12% y-o-y t
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SINGAPORE (Jan 17): UMS Holdings has gained from the turnaround in the semiconductor industry. In its most recent 3Q ended September 2019, UMS reported earnings of $9.2 million, a 21% improvement from the previous year. Revenue, too, increased 12% y-o-y to $32.9 million.

In an interview with The Edge Singapore back in November, UMS CEO Andy Luong noted that despite the recent recovery, the industry at large remains prone to volatility and fluctuations. “The semiconductor business has been great for us; let’s make no mistake about that. But it can be challenging because it can get a bit choppy,” he said.

In a bid to shield itself from the adverse effects of cyclical volatility and changes in demand patterns amid a climate of macroeconomic uncertainties, UMS recently increased its stake in JEP Holdings, which produces precision parts and provides engineering services for clients in the aviation industry. As at end November, UMS held 39.09% of JEP, a significant increase from its initial stake of 7.48%.

With a controlling stake in JEP, UMS is now primed to tap on both the semiconductor industry as well as the aviation industry. According to Luong, the shift into the aviation industry offers the group long-term prospects and high growth for the next two decades.

Market watchers agree. Maybank Kim Eng analyst Lai Gene Lih is especially optimistic on the group’s diversification strategy. “Through associate JEP, UMS is expanding precision metals engineering to non-semiconductor sectors such as aerospace, which sees tailwinds from outsourcing trends,” noted Lai in a recent report.

In addition, Lai also notes that apart from JEP, UMS is also exposed to chemical engineering solutions via a 51% stake in Kalf Engineering, and has integrated part of its upstream process with a 70% stake in Starke Singapore.

Looking ahead, Lai forecasts that UMS will see Patmi growth of 31% in FY2020E, driven by sustained investments from logic and foundry end-customers, and recovery from memory end-customers. Lai has a “buy” call on the stock, with a target price of $1.13, representing 14% upside from the Jan 13 closing price of $1.04.

Apart from its diversification strategy, UMS has also embraced cost-cutting measures. For instance, both UMS and JEP have begun shifting certain labour-intensive operations from Singapore to cheaper areas of production such as Malaysia, Vietnam and Indonesia. “We have to find different solutions to make our solutions and products cheaper,” said Luong.

To illustrate, Luong noted that while one engineer in Singapore would set the group back by some $3,500 per month, the same engineer in Malaysia would only cost about $1,500.

As a result, JEP’s bottom gross margin for 1HFY2019 ended Sept 30, 2019, came in at 19%, an increase from 10% in 1HFY2018. In addition, UMS saw its share of profits from JEP surge 82% y-o-y to $0.7 million.

While the outlook remains rosy, the recent acquisitions have forced the group to slash its dividends by half. For FY2019 thus far, UMS has paid a quarterly dividend of 0.5 cent per share, compared with the one cent dividend for the first three quarters of FY2018. However, Luong says this is not likely to last as he works to restore UMS's cash flow and cash balances to its previous levels.

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