It’s finally book-out day! I’m really glad to finally have the time to sit down and research and review my purchase of UMS.
Basically, UMS is a precision engineering group which specializes in manufacturing high precision front-end semiconductor components and perform complex electromechanical assembly and final testing services. Included in our core business is the production of modular and integration systems for original semiconductor equipment manufacturers.
We have been in the industry for more than 20 years and have established ourselves to be one of the leaders in the semiconductor industry in providing front-end high precision components to original equipment manufacturers and offering the best in class solutions.
I chose this company for many reasons. I will use this post to share my views both on the fundamental and technical aspect (I try!). I will touch on certain areas that I think are essential and the fundamental basis for my purchase.
Firstly, I think the semiconductor industry is going to see a revival, especially here in Singapore. From my previous article, I mentioned about how the government is going to be installing solar panels on rooftops of both schools and housing estates. Why this is important is because I believe, is going to change the way Singaporeans view energy. We all know that solar energy is good because it’s a source of free and renewable energy, especially here in sunny Singapore. Ignoring the cost factor, if we look at the landscape of Singapore where the theme of land scarcity revolves, solar energy is the way to go. We cannot rely on wind energy nor hydro energy for obvious reasons – Land.
Now, I cannot confirm if UMS has any part to play regarding this whole solar panel thing. But from what I know is that, we’re going to be looking at this industry sooner or later. Being a leader in this industry with solid track records put UMS at a very good position to seize opportunities when the time comes.
Firstly, let’s take a look at the fundamentals. I will be zooming into the different aspects that I think are important and elaborate more about my thoughts on those numbers. I’m a rather picture person, pardon me if I’m using too many charts/screen grabs!
First, the thing I love most about this company is how it has ZERO Long-term debt with a reducing Current Liabilities. Not too far into the future we can expect interest rates to begin rising. It’s impossible to remain in this artificially deflated interest rate environment forever.
There are pros and cons to having little debt. Firstly, the company doesn’t have any form of leverage to boost earnings. However, when we look at the company’s financials, the company is earning year after year without running into debt. How is this possible? I could think of several reasons:
- Good management
- Good business
- Foresight into future
All 3 return ratios have been growing from 2012 onwards. This means that overall, the company is becoming more and more efficient in the utilisation of its’ assets, capital and equity. Despite being in the industry for more than 20 years, this company could still do more(Net Income) with less(Asset/Capital/Equity). This is a sign of a great management in my opinion.
Current ratio is defined by Current Asset/Current Liabilities. From what we discussed earlier, the company is moving in the direction of a reducing Current Liabilities. Also, if we look at the Current Asset of UMS, it is either increasing or remaining stagnant. This means that we can somewhat expect the current ratio to increase year after year, ceteris paribus.
The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. For this reason, the ratio excludes inventories from current assets. With the rising quick ratio, we can get an assurance that UMS is in a good liquidity position and that should give investors a peace of mind.
Here, we finally get a glimpse of what the company is up to. Looking at Avg Days Inventory, we see that the liquidity of inventory movement is worsening. This does not indicate much to me except that goods are not moving out as fast.
However, what really gave me a nudge is its’ Avg Days Payable. For the past 2 years it was around 48 days. It made a big leap to 72 days in a year. By making payable increase, there are several implications which I think is beneficial.
- Cash outflow is spreaded out further
- Better credit terms obtained (To pull the average up by so much, I think it’s quite likely that most of the orders come from one or two big buyers)
- Cash is not locked up (Flexibility to execute strategies)
Based on this, the Book Value of UMS stands at $0.455. Dividend Yield of 7.77% is exclusive of special dividends given out as well. From past corporate actions, we understand that basic quarterly interim dividend stands at $0.01. While special dividends go from $0.02(2012), $0.01(2013) and $0.025(2014). Therefore, 7.77% is definitely way under the effective dividend yield which I believe it to be 11.65%! (Assuming $0.02 special dividend)
The Director, Andy Luong, is the largest shareholder of UMS at 21.38%. The next in line is Morgan Stanley at 6.45%. That’s why my focus is on Andy Luong.
Highlighted in red where the lines are is the period where he sold off his shares in the open market. He sold a total of 19m shares in 5 days.
Highlighted in green is when he was issued his bonus share of 1 for 4.
There’s nothing much I could interpret from the corporate actions, just thought that it’ll be interesting to put it up for show.
Overall, I think that UMS has a bright future ahead based on its current financial position. The quarterly dividend payout and high dividend yield is definitely a plus point for me as well. I think this stock is worth accumulating, preferably near the NAV of 0.455. I believe NAV of this company is going to rise over the years as I believe in the management as shown in their performance.