UMS Holdings Limited

Email This Print ThisOperations Review

Extracted from Annual Report 2017

Operations Review

PCs have long been a critical demand driver of the semiconductor industry, with smart phones becoming an integral part during the last decade. More recently, the number of new applications for the industrial, automotive, medical, and consumer markets has exploded, fueling unprecedented demand for semiconductors. This strong demand coupled with improved device pricing, especially for memory, have propelled the semiconductor market past the US$400 billion mark for the first time this year – a mere four years after it reached the $300 billion milestone. By way of comparison, it took 13 years, starting in 2000, for the semiconductor market to grow from $200 billion to $300 billion.

SEMI, the global industry association representing the electronics manufacturing supply chain, in its 2017 Year-end Forecast, projects that worldwide sales of new semiconductor manufacturing equipment will increase 35.6 percent to US$55.9 billion in 2017, marking the first time that the semiconductor equipment market has exceeded the previous market high of US$47.7 billion set in 2000. In 2018, 7.5 percent growth is expected to result in sales of US$60.1 billion for the global semiconductor equipment market – another record-breaking year.

Reports by our key customer also imply robust demand and growth of around 10% CAGR into FY2018. This augurs well for the Group given its primary role in the manufacture of components for various semiconductor equipment and that it handles majority of the manufacturing and assembly for the key customer's flagship deposition system. We have reported in last year's annual report that we have successful renewed its integrated system business contract at the beginning of 2017.

New capacity to meet additional demand

With the current ramp up in demand from semiconductor equipment makers globally, we are seeing more of our unutilized capacity in component manufacturing being tapped to meet the demand of these equipment makers. In order to bolster our customers' confidence in our manufacturing execution capability, we have invested S$10.6 million in 2017 on new production equipment, and will invest similar amounts in 2018. The Group's focus on growing its components business is beginning to bear fruit.

Reap long-term cost savings from Penang Hub

The Penang facility enjoys lower overheads for its component manufacturing operations, such as labor and land costs, which helped to maintain the profitability of the Group. In 3QFY17, the Group has also relocated its systems integration operations from Singapore to Penang. This allows the Group to leverage on the Penang Hub's bigger facility and fuller resources. By achieving longterm savings in a low cost environment, we are in a good position to offer competitive solutions to our customers and this helps to strengthen the strategic relationship with our customers.

We are also pleased to report that we have received a new 10-year pioneer tax incentive by the Malaysian Government, for setting up the system integration operations in Penang.

New group companies progress

In 2017, the Group's associate AllStar Manufacturing Sdn Bhd ("Allstar") has made inroads into the aerospace manufacturing industry. Allstar has been qualified by a few Tier 1 Aerospace companies to supply aircraft components. Moreover, it penetrated the Malaysian automation and semiconductor equipment supply chain. Headcount also increase from 35 employees in 2016 to 92 employees in 2017.

The Group completed its 51% acquisition of Kalf Engineering Pte Ltd ("Kalf"), a water and chemical engineering solutions company, in March 2017. Subsequent to the acquisition, Kalf completed 2 projects, 1 in Chile and 1 in Singapore. In 2018, it expects to complete at least 4 projects in Singapore, Cambodia, Malaysia and Middle-East.

In January 2018, UMS acquired 29.5% or 429,864,300 ordinary shares of Catalist-listed JEP Holdings Ltd ("JEP"). JEP's core business has good long term growth potential and can leverage on UMS's financial and operational strength.

Financial Review

Revenue

Revenue in the Semiconductor segment jumped 58% while sales in Others decreased by S$0.7 million. Both segments of the Group's semiconductor division showed improved results. Semiconductor Integrated System sales soared 73% from S$50.5 million to S$87.4 million in FY2017. Revenue from component sales also went up - by 43% from S$50.9 million in FY2016 to S$73.0 million FY2017.

Geographically, sales in Singapore surged 67% as compared to FY2016 mainly due to stronger Semiconductor Integrated System sales. Revenue in the Group's other served markets also improved considerably, with US sales increasing 61% vs FY2016 while revenue in Malaysia more than tripled to S$6.0 million vs S$2.0 million in the previous year and Others increased 12% in the period under review. The better performance was mainly due to higher component sales.

The Group experienced a strong first half in 2017 mainly driven by the Semiconductor Integrated System sales. Even though the demand for Semiconductor Integrated System sales moderated in the second half, the Group's component business gained strength. This was the result of our focused effort to recover our components business amidst the keen competition from regional players.

Profitability

Net profit attributable to shareholders more than doubled to S$52.0 million in FY2017 compared to S$22.6 million in FY2016. The profit surge was achieved on the back of higher sales during the period under review.

Gross material margin in FY2017 remained stable at 54.7% (vs 54.1% in FY2016). Expenses were generally higher due to the higher cost from more production activities, the consolidation of Kalf Engineering results, increased personnel costs, legal and professional fees as well as higher exchange loss arising from the depreciation of the US dollar. Income tax expense also rose 64% in line with the higher profits.

However, the Group benefitted from a 20% decline in depreciation costs, a S$1.9 million gain on disposal of some old equipment and the S$0.9 million write back of past inventory provision.

Cashflow

The Group's financial position continued to strengthen. As at Dec 31, 2017, after paying dividend of S$26.8 million, UMS chalked up healthy net cash and cash equivalents of S$40.6 million.

It registered positive net cash of S$40.0 million from operating activities and S$31.3 million of free cash flow in 2017. UMS continued to invest to grow its production activities which resulted in an increase in capital expenditure - as part of the RM80 million capex plan previously announced to expand its Penang production facility. Inventories also rose to S$49.6 million, mainly due to the commencement of a new parts consignment program with its key customer.

As with the preceding years, the Group believes its ability to continue maintaining strong free cash flow will give it the necessary balance sheet strength to perform merger & acquisition activities as well as undertake new projects as and when suitable opportunity arises.

Dividend and Bonus Issue

In view of the Group's performance and in recognition of shareholders' support, the Board has proposed a final dividend of 2.0 Singapore cents per ordinary share and special dividend of 1.0 Singapore cent per ordinary share (tax-exempt one-tier) for FY2017. This brings the total dividend proposed and declared to 6.0 Singapore cents per share which includes dividends of 1.0 Singapore cent per ordinary share already paid out in each preceding quarters from 1Q2017, 2Q2017 and 3Q2017.

On top of the dividends, the Group had allotted and issued Bonus Shares in November 2017 on the basis of ONE (1) bonus share for every FOUR (4) existing ordinary shares. This epitomizes the strong fundamentals of UMS' business model as well as the management's commitment to reward the shareholders for their continuous support.

Investor Relations and Market Cap increase

UMS's management places great importance on building good relationships with our local and overseas investors, analysts and media, and keeping them updated on our business strategies, financial performance and operations. Official announcements and press releases are filed on the Singapore Exchange (SGX), and updated on our website.

We participated in investor days with securities firms, and actively engaged the investing community via group meetings with local and international analysts and fund managers to keep them abreast of our financial performance and business operations. We also organise plant visits for analysts and investors. Currently we are covered by 3 research analysts.

The total shareholders' return for the year was around 120%. The market capitalization of the Group has exceeded S$700 million recently.