Excerpts from analysts' reports

OSK-DMG downgrades UMS on insider selling of large stakes
Analyst: Edison Chen
andy_luongAndy Luong, CEO of UMS, sold 7m shares (prior to the bonus share issue last week) in March-April 2014 at SGD0.52/share. NextInsight file photoAmidst possibly falling margins and earnings, two of UMS’ most important stakeholders – its single main customer Applied Materials and CEO Mr Andy Luong – are selling their shares in the company. Downgrade to SELL, with a lower TP of SGD0.47 (from SGD0.70) based on a 7.2x FY14 P/E, which is its 3-year historical average. 

Largest customer no longer a substantial shareholder. Applied Materials (AMAT US, NR), UMS’ single largest customer (accounting for around 80-90% of FY13 revenue), was reported to have sold 2.92m UMS shares at the average price of SGD0.70/share. It has also ceased to be a substantial shareholder as its stake has fallen to below 5%. This means that market will not be notified if it sells more shares in the future. 

Founder/CEO pares stake. Mr Andy Luong, the founder and CEO of UMS, also recently hived off a large amount of his company shares. Although UMS booked a strong financial performance in the past few quarters, he sold an aggregate of 7m shares (prior to the bonus share issue last week) in March-April 2014 at SGD0.52/share.

Perhaps what is most alarming is his recent sale of 13m UMS shares in the open market at an average of SGD0.69/share (Figure 1). As a result, his stake in the company has dropped to 22.0% YTD from 27.81%.  
Cloudy outlook for margins and earnings. Channel checks show that the component supply chain for the semiconductor industry is facing downward pricing pressure. This, coupled with the negative signs stemming from share sales by UMS’ largest customer and CEO, leads us to believe that its FY13 net margin of 24% may not be sustainable in FY14, and its profitability could be vulnerable to downward pressure going forward.

Despite UMS’ robust cash flow and dividends, the unexpected sale of its shares by key stakeholders and its lack of customer diversification has cast a pall over its outlook. As such, we lower our FY14 and FY15 estimates by 11.2% and 14.9% respectively. 
Downgrade to SELL with our new TP based on its historical average P/E instead of DCF, in view of the greater uncertainties ahead. 


UOB Kay Hian: HanKore deal "unfavourable to current shareholders"

brandon_ngAnalystBrandon Ng, CFA (left)

· Downgrade to SELL with a target price of S$0.74. We derive our target price by ascribing a 80% probability for the CEI deal to go through (eventual fair value of S$0.63) and a 20% probability that Hankore will remain as it is (fair value of S$1.18).

We appraise the two scenarios by discounting the profits generated from its engineering, procurement and construction (EPC) and wastewater treatment businesses over the period of its concession (WACC: 8.3%).


· While we do not doubt that the transaction will propel Hankore to be one of the top water players in the China, we are puzzled by the structure of the deal. As the new shares will be allotted at S$0.703 each (post 10-1 consolidation) to CEI, being the 90-day VWAP Price before the date of the first announcement, this will cause a significant dilution to current shareholders.

Valuation of Hankore will thus become very demanding with the combined entity trading at 33x FY14F PE and 3.1x FY14F P/B, vs peers’ average of 25.6x and 2.7x respectively.

· We had expected the deal to be transacted at CEI’s book valuation of S$275m as the new shares is already priced at an 8% discount to Hankore’s book of S$0.76, but instead it was transacted at S$1.21b, slightly higher than the S$1.1b-1.2b appraised by American Appraisal and Grant Sherman.

· Even at the best-case scenario as the company gears itself up from 0.3x net gearing to 0.5x net gearing for acquisition, the eventual fair value of the combined entity will only increase from S$0.63 to about S$0.79, taking into account the larger share base.

Recent story: QT VASCULAR -- Target 60 Cents, HANKORE -- 91 Cents

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