UMS Holdings Limited

Email This Print ThisLetter to Shareholders

Extracted from Annual Report 2018

Dear Shareholders,

On behalf of the Board of Directors, we are pleased to present the Annual Report of UMS Holdings Limited ("UMS" or the "Group") for the financial year ended 31 December 2018 ("FY2018"). The year started well although the second half of the year became challenging. However, despite the more difficult second half, we still showed relatively strong and stable performance for the full year. We continued to reward shareholders with quarterly dividends - 4.5 cents in total for the full year. FY2018 has also been a remarkable year for the Group in terms of competencies and capabilities as UMS added production capacity in its Penang Hub and acquired Starke Singapore Pte Ltd ("Starke") in August 2018. The acquisition allows UMS to strengthen its upstream integration to reap supply chain efficiencies and cost savings and enhance business and operational synergies within the Group to better serve global customers.

The Starke acquisition is the Group's second acquisition during the year. The Group had earlier acquired a 29.5% stake of Catalist-listed JEP Holdings Ltd ("JEP") in January 2018. The JEP acquisition forms part of UMS' strategy to diversify beyond its traditional semiconductor business.

With this stronger material sourcing and distribution network, and combined strengths of UMS, JEP and Starke, we can improve operational synergies as well as tap into growth opportunities in new markets.

We are now in a better position to further entrench ourselves in the precision engineering industry and offer more integrated value-added engineering services for equipment manufacturers.

Business Performance

UMS achieved a net profit of S$43 million in FY2018, down 19% from S$52 million from the previous year ended 31 December 2017 ("FY2017"). The Group's revenue fell by 21% to S$128 million in FY2018, against S$163 million in FY2017 in weakening economic conditions.

Contrary to a buoyant first half of FY2018 when our major customers had strong orders from its end-users, the second-half performance was relatively weaker with many customers in the semiconductor industry postponing their capital expenditures.

Plunging memory prices and a sudden shift in companies' strategies in response to trade tensions are driving rapid decline in capital expenditures, especially among leading-edge memory manufacturers, some fabs in China and some projects for mature nodes such as 28nm.

As a result of these factors, revenue from the semiconductor segment declined 23%. Semiconductor Integrated System sales fell 47% to S$47 million in FY2018 from S$87 million a year earlier. Revenue from component sales increased by 5% to S$76 million in FY2018 vs S$73 million in FY2017. Sales in the Others segment rose by 137% after the acquisition of Starke.

Higher percentage of component sales in the Group's product mix helped the Group improve its gross material margin to 60% for FY2018, compared to the 55% recorded in FY2017. Personnel costs were flat mainly due to higher salaries resulting from higher headcount offset by lower bonuses. Depreciation rose 31% mainly due to addition of production machinery while other expenses slid 5% over last year. The Group also benefitted from an S$0.8 million foreign exchange gain due to appreciation of the US dollar during the year and an S$1.6 million gain on bargain purchase of Starke. Income tax expenses slid by 19% in line with lower profits.

Strategic Diversification

The two companies we invested this year were profitable. We will step up efforts to improve our operational synergies and help to spur their growth in the years ahead.

Moving forward, the Group will continue to make efforts to widen its customer base and seek opportunities to diversify its business portfolio through mergers and acquisitions to reduce the dependency on a single segment.

Outlook

The near-term outlook continues to be challenging due to much uncertainty in customers' order flows amid the ongoing China-US trade tensions which affected demand from semiconductor chipmakers.

The longer-term outlook however remains upbeat. SEMI, the global industry association for the electronics manufacturing supply chain reported that even though worldwide sales of new semiconductor manufacturing equipment are projected to dip by 4 percent in 2019, it will bounce back to a 20.7 percent growth to hit an all-time high of US$71.9 billion in 2020.

The semiconductor industry is forecast to expand over the long term, driven by massive growth of interconnected devices with heavy demand for processing power and storage. Data is also expected to see exponential growth, from about 40ZB in 2018 to 50ZB in 2020, leaping to 163ZB in 2026.

This augurs well for the Group given that its primary role in the manufacture of components and systems for various semiconductor equipment. Barring unforeseen circumstances, the Group is optimistic that prospects remain bright for FY2019.

Appreciation

On behalf of the Board, I wish to express my heartfelt gratitude to our business partners and associates, for their commitment and contributions to UMS. Your support will certainly underpin our continued efforts to strive for growth and profitability. To our shareholders, we appreciate your support and belief in our business. The Board and management at UMS remain committed and confident of the Group's business. We aim to continue reporting better financial and operational performance and rewarding shareholders with dividends.

I would also like to take this opportunity to thank the management and staff for their hard work and dedication. And we extend a warm welcome to the management of JEP and Starke into the UMS family. We look forward to a long and fruitful partnership.

Luong Andy

Chairman and Chief Executive Officer
UMS Holdings Limited