UMS Holdings Limited

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Extracted from Annual Report 2018

Operations Review

UMS Group provides manufacturing services of components and integrated systems mainly to the semiconductor and related industries. End-users of our products comprise mainly manufacturers of semiconductor wafers and chips.

The Group's results are driven primarily by spending on capital equipment and services to support key technology transitions or to increase production volume to meet worldwide demand for semiconductors.

Spending by semiconductor end-users which include companies in the foundry, memory and logic markets is driven by demand for advanced electronic products such as smartphones and other mobile devices, servers, personal computers, automotive devices, storage, and other products.

UMS' strategic priorities include developing manufacturing capabilities and capacities to help solve customers' product delivery challenges; expanding its market opportunities in the semiconductor and other complex equipment industries.

As key manufacturing partner of its global customers, UMS invests heavily in its production capacities to be "delivery-ready" to meet any surge in customer demand. We work closely with global customers to design systems and processes to meet their planned technical and production needs.

Investment in semiconductor manufacturing equipment and services remained a strong driver of revenue during FY2018. Semiconductor equipment end-users continued to invest in new capacity and technology transitions, although overall spending by our key customer to UMS was lower towards the second half of the year.

Our Semiconductor Integrated System sales decreased 47% in FY2018, resulting from lower customer demand and lower share allocation in line with the latest integrated system business contract. Our component business performed within expectation, growing 5% over last year.

While our key customer anticipates major technology trends to continue driving long-term growth in the semiconductor industry, trends for the second half of 2018 are likely to continue to early FY2019, with lower spending by memory and foundry customers.

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 shrink slightly by 4 percent in 2019, it will bounce back with a 20.7 percent surge with 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.

Available Capacity To Meet Long Term Demand

To bolster our customers' confidence in our manufacturing execution capability, we have invested S$26 million in 2017 and 2018 on new production equipment. This has helped the Group to continue grow its components business in FY2018.

We have also added sheet-metal production capability in our Penang Hub which will further strengthen our vertical integration capabilities and enhance our production capacities. These initiatives taken will put us in good stead when the demand ‐ which may come abruptly ‐ returns. With the substantial investment already made, the Group does not envision incurring high capital expenditure in FY2019.

Reap long-term cost savings from Penang Hub

Our Penang Hub, having a big facility and ample resources, is also maturing quickly with the workforce there ready to take on more complex jobs. The Group will continue to leverage on Penang Hub's cost benefits to offer competitive solutions to existing and prospective customers.

Both our components manufacturing and system integration operations in Penang enjoy a 10- year pioneer tax incentive given by the Malaysian Government.

Performance Of Group Subsidiaries And Associates

In January 2018, UMS acquired 29.5% or 429,864,300 ordinary shares of Catalist-listed JEP Holdings Ltd ("JEP") and bought additional shares during the year to maintain shareholding around 28%. Mr Andy Luong had since joined JEP's board. Under the strategic guidance of Mr Luong, JEP managed to increase its profit by 166% from S$0.8 million in FY2017 to a profit of S$2.2 million in FY2018.

The Group completed its acquisition of Starke Singapore Pte Ltd ("Starke") in August 2018. This acquisition allows UMS to strengthen its upstream integration to reap cost savings and enhance business and operational synergies within the Group through a more efficient supply chain to serve its customers. Starke runs a profitable business and has recently set up a Malaysian subsidiary to better serve the Malaysian market.

The Group's associate Allstar Manufacturing Sdn Bhd ("Allstar") managed to grow its revenue even though profitability fell below expectations. After much deliberation, the shareholders agreed to a restructuring arrangement enabling UMS to take full ownership of Allstar after the exercise.

Kalf Engineering Pte Ltd ("Kalf"), our water and chemical engineering solutions company, completed three projects in FY2018, one in Cambodia and two in Singapore.

Financial Review

UMS Group achieved a net profit of S$43.1 million for the financial year ended 31 December 2018 ("FY2018"), a 17% decline from the record net profit of S$52.0 million accomplished in the previous year ended 31 December 2017 ("FY2017"). The Group's revenue fell 21% to S$127.9 million in FY2018, compared to S$162.5 million in FY2017 in the face of a weakening economic environment.

Revenue

The semiconductor industry was expected to enjoy a robust outlook in early 2018 with a fourth consecutive year of equipment investment growth forecast for 2019 ‐ a feat never achieved before. However in August, the SEMI World Fab Forecast Report ‐ tracking more than 400 fabs and lines with major investment projects ‐ predicted a slowdown in the second half of 2018 and into the first half of 2019.

The Group experienced a reasonably good first half in FY2018. Even though the demand for Semiconductor Integrated System moderated, the Group's component business gained strength over FY2017. This was the result of our continued focus to grow our components business amid keen competition from regional players.

During the second half of FY2018, plunging memory prices and a sudden shift in companies' strategies owing to trade tensions led to rapid declines in capital expenditures, especially among leading-edge memory manufacturers and some fabs in China. This resulted in the Group's revenue dip in the Semiconductor segment.

Semiconductor Integrated System sales fell 47% to S$46.6 million in FY2018 from S$87.4 million a year earlier; while revenue from component sales increased by 5% to S$76.4 million in FY2018 vs S$73 million in FY2017.

Geographically, sales out of Singapore dipped 37% from the previous year due to lower demand for Semiconductor Integrated Systems. Those from the US and Taiwan shot up 41% and 13% respectively vs FY2017 due to higher component sales.

Our diversification efforts are beginning to bear fruit. Even though Semiconductor segment revenue declined 23%, revenue for the Others segment soared by 137%, mainly attributed to the acquisition of Starke Singapore Pte Ltd.

Profitability

The Group clocked in an improved gross material margin of 60% for FY2018 compared to FY2017 (55%) due to higher percentage of component sales in the Group's product mix. 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. Rental expenses were down 50% after consolidation of our US operations into the Milpitas facility. Freight charges fell 14%, upkeep of machinery expenses was down 22%. Legal and professional fees also went down by 11%.

For the full FY2018, the Group benefitted from a S$0.8 million foreign exchange gain (vs a loss of S$3.1 million in FY2017) due to appreciation of the US dollar during the year and a S$1.6 million gain on bargain purchase of Starke Singapore. Income tax expenses slid by 19% in line with lower profits.

The Group's earnings per share ("EPS") for FY2018 stood at 8.0 cents compared to 9.7 cents in FY2017. Group net asset value per share rose to 42.6 cents in FY2018 from 40.1 cents in FY2017.

Cashflow And Dividend

The Group registered positive net cash of S$38.7 million from operating activities and S$23 million of free cash flow in 2018. UMS continued to invest to grow its production capabilities 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 rose to S$70.4 million, mainly due to raw materials purchase committed to our suppliers before the abrupt downturn.

The Group has deployed significant amount of cash to invest in businesses outside the semiconductor industry. These investments should provide the group with alternative growth opportunities in the mediumto- long term and provide diversification away from the semiconductor business.

In view of the Group's lower net cash position and to fund our expansion, we need to balance the Group's dividend payments and financing options to ensure sustainable progress. In line with this, the Directors have proposed a final dividend of 2.0 Singapore cents per ordinary share (tax exempt one-tier) without any special dividend this year. This will bring UMS' total dividend for FY2018 to 4.5 Singapore cents per ordinary share.

Together with its interim dividend, UMS' total final dividend constitutes a payout ratio of 56% compared to 58% for the previous corresponding year. Going forward, the Group remains committed to reward its shareholders by reinstating the high payout ratio once the cash flow requirements of the business permits. The Directors have also proposed a share buyback mandate as part of its effort to enhance shareholders' value.

Investor Relations and Market Cap increase

The UMS 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.

Despite the decline in UMS share price, we continued to engage the investment community by participating in investor days with securities firms. We also 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. This will stand us in good stead when the market recovers.