UMS Q1 Results: Good Free Cash Flow

UMS released their first quarter 2013 results with a poorer profit and margin. Dividend of 1 cent maintained.

We first talk about UMS Holdings as a cyclical stock (read here). In the last quarter, results was lukewarm and further examination shows that gross material margins have fallen from 54% to 41% on a discount to major customer Applied Materials (AMAT)

Gross Material Margins

You can read the full results here.

Orders from foundries have improved in January to March so much so that  gross material margins were restored to 48%.

Still gross material margins fell compared to 2012 of 52%.

Overall, UMS’ gross material margin decrease from 52% in 1Q2012 to 48% in 1Q2013, mainly due to product mix.

Integrated system segment experienced a lower margin due to price discounts extended to the Group’s major customer.

Furthermore, more subcontracting works resulting from labor shortage in Singapore had also affected the margin.

It looks like our worst fear is realized that in order to secure a long term  contract with Applied Materials, UMS have to provide a discount to the customer

From the recent AGM, management have taken steps to maintain the margins by moving production to Penang.

This also serves to indicate what the SME are thinking of in terms of Singapore as a manufacturing hub.

While the Group is cautiously optimistic about the prospects of the new year, it is picking up pace to mitigate the short term fluctuations and cyclical nature of the semiconductor industry with cost management initiatives and improving operating efficiencies.

For example, UMS will continue to hasten its process of relocating its Singapore manufacturing processes to Penang in order to reduce operating costs to increase its competitiveness and profitability as well as to alleviate the labour shortage in Singapore. Additionally, UMS is also working with existing and new customers in the oil & gas industry to seek additional revenue streams.

All this will probably see UMS maintaining its margins at 50% range. Not as high at 54% but still a good figure.

Free Cash Flow, Profit and Capex

Profit came in at 5.2 mil versus 6.032 mil last year same quarter.

Free cash flow came in at 6.6 mil versus 4 mil last year.

Recall that to pay a nice 8% yield on current price, they will need 13.7 mil a year  or 3.43 mil per quarter.

This cash flow  looks good  enough to pay a 2 cent dividend.

The concern here is the low capital expenditure.

In the last AGM, the management have indicated that in 2005 and 2008 they have already spent their capex to buy the capital investments require to produce.

These equipment would last approximately 15 years (!!!), so the next replacement cycle could be in 2020.

They will only need to purchase new equipment if  AMAT comes up with something revolutionary, thus as their supplier they will also need to invest as well.

In any case, this is just an estimate. UMS guidance is that they will not need capex for the next 3 years. The safe thing to observe is that whether UMS starts building up cash to get ready for the eventual capex long down the road.

Balance Sheet

The balance sheet is clean. The good thing is that they have also in a quarter repaid 15 mil out of the 17 mil debts they raise last quarter.

As of now they are in a very healthy state.

Summary

UMS have indicated that their customer believe foundry spending are likely to be better in 2013.

I believe the 4 cents dividend this year is likely to be sustainable, with the prospect of a 6  cents dividend.

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