We have a slew of full year earnings in this 2 days. The first one to talk about is UMS.
I talked about it quite a short while ago the cyclical nature of this stock (Read here)
True to the cyclical nature, Q4 turns out to be worse than Q3.
Revenue was down 14% and Net profit was down 79% from a year ago. Short term income suffered from a higher inventory change and less revenue earned.
The full year results look much better with a more or less similar revenue from last year but net profit was down 39% from a year ago to 17 mil.
Assets was up, but that is not telling the full story as property, plant and equipment was down from 59 mil to 50 mil.
Goodwill was up from 60 mil to 81 mil. We will touch on this later.
Balance sheet shows a new 17 mil short term borrowing together with lesser cash holdings. This was brought about from the acquisition of Integrated Manufacturing Technologies Pte Ltd (IMT-S) and Integrated Manufacturing Technologies Inc (IMT-USA)
In terms of operating cash flow for Q4, cash flow before working capital was 2.8 mil versus 8.3 mil. Cash flow from operations was up from 5.7 mil to 7.4 mil.
Capex for Q4 was very little at 0.6 mil.
In terms of full year, operating cash flow was down from 39 mil to 31 mil. Capex was lower from 7.4 mil to 1.7 mil.
Next Quarter’s Growth
This definitely look a poor quarter, and would likely put off many dividend investors. We already warn of the cyclical nature of it.
We realize that while not 100% accurate, using the Book to Bill information published monthly at SEMI (see data here) gave us quite a good guess how the quarterly result will look like.
Where the foundries needs are high, Applied Materials (AMAT) demand is high, UMS Holdings sales is high.
At least we see in January, the Bookings recovered to August levels. Should demand continue to progress, the next quarter should look better.
Taken from AMAT’s presentation, Q1 does look much better.
In UMS own words:
The decrease in business volume in 4Q2012 was in line with the management’s expectation. Previously, the Group had announced that its key customer had revised their forecast downwards due to weaker-than-expected demand from the foundries as investment plans were delayed.
This was a result of weak consumer demand, exacerbated by the continued European crisis and global economic uncertainties. This was particularly evident in the ongoing declines in personal computer sales.
However, forecasted demand has improved for 1H2013, which is in line with expected improved global billing data for the similar period.
Additionally, a major global foundry had reportedly demanded advance delivery of the front-end equipment needed for its 28nm process, which had seen brisk demand. The key customer of UMS is one of the fab-tool makers that will benefit from this early delivery.
Internally, UMS is progressing well on the relocation of its operations to Penang. This will help to reduce operating costs and alleviate the shortage of labour in Singapore.
With that in mind sales for the next quarter should recover.
Cash flow and Dividend Coverage
The question on dividend investors mind is that amidst a weak quarter, can UMS sustain a 4 cent dividend. That translates to 0.04 x 343 mil shares equal 13.72 mil or 3.4 mil per quarter.
In a rather weak quarter, net profit was much less that 3.4 mil. This quarter its 0.8 mil and last quarter its 2 mil.
The true ability to pay dividends has to be the free cash flow and this quarter the free cash flow was 6.8 mil, which amply is able to sustain the 3.4 mil.
Full year free cash flow looks even better at 29 mil which is able to pay this 13.72 mil.
The full year cash flow gives us a taste of how crazy the cash flow can fluctuate.
The onus is how many bad quarters will a semi conductor company like UMS have.
Do note that in the past we have seen year where the book to bill hovers around 0.46 which shows a drastic reduction in orders.
The key to UMS, is to be prudent with the cash flow earn during good years and save them so that they even out the bad years. This will be what we judge the management performance by.
Quality of Cash Flow & Capital Replacements
A worry note is that although we say that operating cash flow for the quarter is able to pay out dividend, it is largely made up of 2.6 mil per quarter in depreciation and a reduction in inventory from last quarter.
While less inventory due to lower demand is ok, the worrying trend is the capex is much lower than the depreciation.
We know that in 2009, in the midst of the GFC, UMS invest a fair bit in capex.
The current state is that full year capex is lower than depreciation and I feel questions need to be posted to management their capex requirements going forward and whether they will be lower or higher than past cost.
There is also the question of spending 27 mil to acquire IMT-S and IMT-USA. While they were previously managed by Andy Luong, the current CEO, is there a conflict of interest and if it is not revenue generating, is it worth paying that much for synergy?
2 Cent Dividend
Still I am presently surprise that the dividend was reduced to 2 cent from 3 cent the previous year.
This would bring full year dividend to 5 cent. At current price, that’s a 10.8% yield.
For a cyclical stock, we wouldn’t want to overpay it. The safety is much higher at 35 cents when we first observed this.
And it will be great if they can sustain a 4 cent dividend per annum over a 10 year period. Anything more than that is a bonus.
There are much questions to be asked and whether to increase and reduce our stake will depend very much on uncovering them.