UMS Holdings Limited

Email This Print ThisLetter to Shareholders

Extracted from Annual Report 2016

Dear Shareholders,

In last year's annual report, I provided the outlook that the slow business activities from the last quarter of FY2015 will follow into FY2016, with subdued performance in the first half of the year. However, UMS remains positive about the outlook for the second half of FY2016. This projection was largely in line with the actual business performance in FY2016.

Overall, UMS's semiconductor business remained relatively stable in FY2016. UMS recorded a revenue of S$104.2 million, as compared to S$111.1 million in FY2015. In terms of profitability, UMS recorded a net profit of S$22.6 million for FY2016, a 34% decrease from S$34.3 million in FY2015. However, despite the lower profits, I am pleased to report that the Group generated cash comparable to FY2015. UMS generated a positive operating cash flow of S$33.9 million and free cash flow of S$31.2 million in FY2016, as compared to S$35.8 million and S$31.3 million respectively in FY2015.

As such, we are able to continue the tradition of rewarding our shareholders every quarter. To round up the year, the Board of Directors is therefore pleased to recommend and propose a final dividend of TWO (2.0) Singapore cents per share and a special dividend of ONE (1.0) Singapore cent per share. Subject to shareholders' approval, this will bring the total dividends declared and proposed for FY2016 to SIX (6.0) Singapore cents per share.

Business Performance

The global semiconductor equipment industry remained relatively stable in FY2016. UMS experienced a pickup in orders from 3Q2016 following a weak first half of the year. Subsequently, the Group experienced a strong 4Q2016 that helped pushed its revenue cross the S$100 million mark for the entire year.

In terms of segmental revenue contribution, UMS's Semiconductor Integrated System sales did well for FY2016, increasing 19% from S$42.6 million in FY2015 to S$50.5 million in FY2016. As a result of stronger competition from other regional players, component sales in FY2016 decreased by 25% from S$67.6 million to S$50.9 million.

Revenue from Others segment increased 190% from S$1.0 million in FY2015 to S$2.8 million in FY2016. This relates to contract manufacturing work for Kalf Engineering Pte Ltd ("Kalf") with regards to the fabrication of water disinfection systems.

On profitability, the Group's gross material margin declined to 54% in FY2016 as a result of the change in product mix. Accordingly, net profit margin in FY2016 decline to 22%. This was still a respectable performance when compared to the average of the last 5 years.

Maintain Strong Cash Generation Ability

The Group has consistently maintained its good cash generation ability and was able to continue this track record in FY2016. Amidst the difficult market conditions in FY2016, the Group generated a positive operating cash flow of S$33.9 million and free cash flow of S$31.2 million. The cash generated is much higher than the net profit because many expenses recorded in the income statement were non-cash in nature.

As of 31 December 2016, after paying dividend of S$25.7 million, the Group achieved net cash and cash equivalents of S$42.6 million, surpassing last year's record of S$38.9 million.

Diversification

Over the years, UMS has been exploring opportunities to diversify its business portfolio. Following the investment in AllStar Manufacturing Sdn. Bhd. in January 2016 to make inroads into the Malaysian and regional aerospace manufacturing industry, the Group announced on 24 February 2017 that it had entered into a conditional subscription agreement ("Agreement") with Kalf, a water and chemical engineering solutions company. Under the Agreement, UMS will subscribe for 51% of the enlarged share capital of Kalf for a total consideration of S$990,000 in cash, on a willing buyer willing seller basis. The consideration will be funded from internal sources of UMS.

The demand for Kalf's electro-chlorination systems depends more on the infrastructure and industrial development of the countries it conducts business. Kalf conducts business in regions including China, India, South East Asia, Middle-East, Africa and South America. The installation and replacement of electro-chlorination systems designed and fabricated by Kalf are required as part of the operations and maintenance of power plants, chemical plants and offshore platforms. In addition, Kalf has the capability to undertake water treatment projects. Accordingly, the investment into Kalf provides an opportunity for the Group to diversify its business operations into a specialised and growing industry that is not dependent on semiconductor chipmakers' capital spending and further provides the Company with increased technical skills in a new industry.

Moving forward, the Group will continue to seek opportunities with good long term growth potential and where it can leverage on its financial and operational strength.

Outlook

SEMI, the global industry association representing more than 2,000 companies in the electronics manufacturing supply chain, reported in their SEMI Year-end Forecast released in December 2016 that worldwide sales of new semiconductor manufacturing equipment are projected to increase 8.7% to $39.7 billion in 2016. SEMI has also projected that in 2017, another 9.3% growth is expected, resulting in a global semiconductor equipment market totaling $43.4 billion.

SEMI also forecasts that in 2017, equipment sales in Europe will climb the most, by 51.7%, to a total of $2.8 billion, following a 10.0% contraction in 2016. In 2017, Taiwan, Korea and China are forecast to remain the top three markets, with Taiwan maintaining the top spot even with a 9.2% decline to total $10.2 billion. Equipment sales to Korea are forecast at $9.7 billion, while equipment sales to China are expected to reach $7.0 billion.

The Group has recently renewed its integrated system business contract with its key customer for another 3 years, with the option to further extend another 3 years, upon reasonable and mutually agreed terms and conditions. This puts the Group in a good position to benefit from the industry growth and also adds stability to its revenue base.

Moving forward, the Group will take steps to recover its component sales amidst the keen competition and also continue to seek opportunities to further strengthen its positioning in the global semiconductor value chain.

The Group remains optimistic that barring unforeseen circumstances, business activities will be satisfactory and FY2017 will be a profitable year.

A Note of Thanks

I would like to express our heartfelt gratitude to our Board members for their invaluable contributions.

I would also take the opportunity to convey our deepest appreciation to our management and staff for their contributions and commitment to always rise up to challenges.

Our appreciation also extends to our customers, business partners, associates and shareholders for their continued support and belief in us. I am confident that the solid foundation, strong partnerships and competent team will propel the Group to greater heights.

Luong Andy

Chairman and Chief Executive Officer
UMS Holdings Limited