UMS Holdings Limited

Operations Review

Extracted from Annual Report 2020

Operations Review

The year under review underscored UMS' operational resilience and foresight in investing during the industry down cycle. The Group has been making efforts to strengthen our vertical integration capabilities and enhance our production capacities. These initiatives prepare us to meet sudden surge in demand and cement our position as a strategic manufacturing partner to our customers.

The Group closed FY2020 with record revenue as demand for our semiconductor systems and components remains very strong. In the course of FY2020, operations across our different business segments were disrupted to varying extent by the COVID-19 pandemic. Additionally, there was temporary manpower disruption as a result of governments imposing movement restrictions to combat the spread of the virus. The UMS Team responded quickly to put in place precautionary measures as well as making extraordinary efforts to overcome the many challenges. Although production output was affected at the beginning of the year, it recovered quickly and rose steadily throughout the rest of the year.

Review of Business Segments

Semiconductor

The Group's semiconductor business remains the core activity of the Group. Our main strategic thrusts were all focused on this segment which continued to enjoy good growth potential.

The semiconductor business comprises of two key segments – component parts and integrated systems.

For the year under review the major revenue driver was the integrated systems. Semiconductor Integrated System sales jumped 32% from S$58.8 million in FY2019 to S$77.6 million in FY2020. Revenue from component sales increased 22% from S$61.9 million in FY2019 to S$75.5 million in FY2020.

Global sales of semiconductor manufacturing equipment by original equipment makers registered a new industry record of $68.9 billion in 2020. SEMI, the global industry association representing semiconductor companies has projected global sales of semiconductor manufacturing equipment to keep growing till 2022, reaching US$76.1 billion. According to Global Market Insights, the adoption of technologies such as, artificial intelligence (AI), IoT in fabrication and the increasing use of advance chipsets in automotive and consumer electronics, will drive the demand for semiconductor manufacturing over the longer term. This demand is expected to boost support for the semiconductor manufacturing equipment market which is forecast to reach US$80 billion by 2026.

With the current ramp up in demand from semiconductor equipment makers globally, we were able to boost our capacity utilization to meet the demand of equipment makers. In order to bolster our customers' confidence in our manufacturing execution capability, we have further invested S$6 million on new production equipment and purchased the adjoining land to our Penang manufacturing hub.

Others

The Group's material distribution subsidiary Starke Singapore Pte Ltd (“Starke”) continues to grow both revenue and profits in FY2020. Its Malaysian subsidiary set up last year to better serve the Malaysian market grew revenue by 172%. Even though Starke suffered lower sales from its aerospace customers, overall sales increased by 26%. To ride on the expected increase in demand from its manufacturing customers, Starke acquired the factory premises next door.

Kalf Engineering Pte Ltd (“Kalf”), our water and chemical engineering-solution company, faced delays in shipping out the fabricated systems of two projects in FY2020 due to the COVID-19 pandemic.The Board is closely monitoring the performance of Kalf as it works hard towards returning to profitability.

Risk Mitigation Through Multi-location Manufacturing

Despite our Penang Hub offering lower operating costs as well as human resource availability, the Group has maintained its Singapore manufacturing operations. This was to mitigate disruption risk arising from unforeseen circumstances. The COVID-19 pandemic has shown that our strategy was right. The Singapore operation stepped up to overcome many challenges when our Penang operation was affected during Malaysia’s Movement Control Order (“MCO”). The Group was able to tap on its associate company – JEP for assistance during the pandemic. Moving forward, we will continue to maximize operational synergies with JEP to enhance our manufacturing resilience.

Financial Review

The Group achieved a record revenue of S$164.4 million for the year ended 31 Dec 2020 (“FY2020”), a 25% increase from the S$131.9 million reported in FY2019 despite an unprecedented global pandemic environment.

Revenue

Revenue in the Semiconductor segment jumped 27% as compared to FY2019. Both divisions of the Group's semiconductor segment showed improved results.

Semiconductor Integrated System sales jumped 32% from S$58.8 million in FY2019 to S$77.6 million in FY2020 and Component sales increased 22% from S$61.9 million in FY2019 to S$75.5 million in FY2020. Revenue in the Others segment edged up 2%, mainly due to growth in material distribution sales from its materials distribution subsidiary, Starke.

Geographically, FY2020 revenue went up in all of the Group's key markets, except the US which remained relatively stable and the Others segment which declined 21% due to lower revenue from Kalf. Strong demand for Semiconductor Integrated Systems drove Singapore sales up by 33% while sales in Malaysia and Taiwan climbed 54% and 17% respectively.

The Group faced severe challenges shortly after the start of the year from government lockdown measures Malaysia's Movement Control Order (“MCO”) and Singapore’s Circuit Breaker measureswhich caused supply chain disruptions, manpower constraints and other issues to the Group.

The UMS Team responded quickly to put in place precautionary and health safety measures as well as making extraordinary efforts to overcome the many challenges. Although 1QFY2020 revenue suffered a drop as compared to 4QFY2019, it rose steadily throughout the rest of the year.

Profitability

The Group grew its net profit attributable to shareholders for FY2020 to $36.5 million on the back of the record sales of $164.4 million. It was a 9% rise in net profit from $33.6 million recorded the previous year.

Gross material margins improved from 52.9% in FY2019 to 53.3% in FY2020 reflecting a marginal productivity gain in the Group's operations.

The Group managed to outperform FY2019 despite significant impairment costs incurred in FY2020 – which included a one-off S$7 million impairment of goodwill in its subsidiary Kalf Engineering (“Kalf”) and investment in associate company JEP Holdings Ltd (“JEP”) as well as a S$2.1 million share of loss in JEP.

The loss in JEP was mainly attributed to a goodwill impairment of S$6.25 million and the Group's share of the impairment loss was S$2.5 million. Excluding these items, the Group would have achieved net profit attributable to shareholders of S$46.0 million, a 37% surge from FY2019.

The weaker US dollar weighed on the Group's overall earnings for the year. Depreciation expenses increased due to new machinery and additional factory space acquired by Starke Singapore (“Starke”). Higher personnel costs as well as higher freight charges and up keep of machinery were in-line with higher production and revenue.

Income tax for the year also rose 16% in line with higher profits for the year.

The Group's earnings per share (“EPS”) for FY2020 improved to 6.83 cents from 6.26 cents in FY2019. Group net asset value per share climbed to 47.11 cents in FY2020 from 45.35 cents in FY2019.

Cashflow And Dividend

The Group continued to enjoy strong positive cash flow.

For FY2020, the Group achieved record high net cash flow from operation activities with S$56.4 million in positive net cash flow from operating activities versus S$53.6 million in FY2019.

Free cash flow declined to S$45.0 million from S$53.4 million in FY2019.

The Group made additional investment of S$9.8 million to enlarge its footprint in Penang, Malaysia. It bought new equipment and Starke acquired additional factory space, all in anticipation of higher customer demand.

The Group grew its cash balances substantially despite increased investment of S$1.8 million in JEP Holdings, share buyback of S$1.9 million and a dividend payment of S$26.7 million to shareholders.

To allow the Group greater financial flexibility in uncertain times, and to take advantage of new growth initiatives in the short-term, the Board has recommended moderating the dividend payout of 1 cent per share to shareholders for FY2020.