UMS Holdings propose 1 for 4 bonus share issue

UMS yesterday announced that they will propose a bonus share issue of 1 share for 4 shares shareholders already owned.

Announcement here.

The rationale of the bonus issue is as such:

The Company is considering the Proposed Bonus Share Issue to increase the issued share capital base of the Company to reflect the growth and expansion of the Group’s business, and to give due recognition to its shareholders for their continuing support for the Company at the same time. The Proposed Bonus Share Issue, if carried out, will also increase the accessibility of an investment in the Company to more investors, thereby encouraging trading liquidity and greater participation by investors and broadening the shareholder base of the Company.

Bonus shares technically do not have much difference from a share split. It usually means instead of paying out cash dividends, I give you “shares” instead. Its an indirect way of saying, “I don’t want to pay out cash to you,  I want you to believe in me the management, so leave the cash with me”

The outstanding number of shares will go up, and if profits does not increase, the earnings per share and dividends will go down.

We seen a few companies doing bonus shares as a reward to share holders, notably Challenger Technologies. I am still thinking what kind of angle the CEO Andy is trying to play here.

We know that they struggle to expand their business to diversify their single customer risk. We were told the last capex in 2009-2010 will last for some time. Unless they have a new product in the works, there shouldn’t be a need for more capex in machinery. Does this signal that AMAT might be giving them more business?

Not quite. This year, including the special dividends, UMS would have paid out 6.5 cents. At current price of 77 cents, that is 8.4%. If they need the cash flow, they would have paid out less.

The quantitative deduction from Ms TEH hooi ling in the past is that bonus shares, better than rights issue leads to higher share price.

Andy have already said, this business, they don’t know what’s going to happen 3 years down the road, so we are going to pay out as much of free cash flow we can.

If this is a case, we won’t be surprised these financial actions is a forced push to make share price higher. Perhaps an outright UMS sale is on the cards.

This expansion on their outstanding number of shares would mean that it goes up from 343 mil to 428 mil.

Previously to pay out 6.5 cents (normal + special) they need SG$22 mil in cash flow.

2010 to 2013 Net operating cash flow is as such:

• 27 mil
• 34 mil
• 28 mil
• 27 mil

AMAT have made UMS a good cash flow generator but the question is when is their capex required to ramp up and replace. We do know they do have machines that are not in use yet.

Still the trend seems to be the bonus share issue firms targeting a same amount of dividend payout.  With no capex, that would mean they need 21mil to pay 5 cents. Seems the dividend can be maintained well.