12 JEP to book ‘a small profit’ in 2020 despite aviation woes; UMS kept busy with more orders
Andy Luong’s precision machining companies, JEP Holdings and UMS Holdings, seem to be holding well despite the onslaught of the Covid-19 pandemic and the breakdown of global supply chains. Luong, who is executive chairman and CEO of both companies, says that seven months into the outbreak, there are some indications of flights resuming. This spells good news for JEP, which primarily focuses on the aerospace industry.
Meanwhile, Luong expects UMS to book strong results in the next two to three quarters, thanks to its semiconductor division which is considered an “essential” service.
To be sure, the aviation industry is still reeling from travel restrictions grounding business travellers and holidaymakers alike. However, Luong is confident that JEP will not sink into the red this fiscal year, but instead record a “smaller profit” on the back of a plunge in demand.
“We are starting to see a slowing demand for the next two quarters,” Luong tells
in an interview. “Most of our revenue [from the aerospace industry] will be slow,” he adds.
“We don’t know yet because we’re only into our first four months of the year,” stresses Luong. “But we’re still shipping parts and making money. In the worst-case scenario, we’ll make a small profit, but there are no chances of making losses in 2020,” he adds.
For the full year ended Dec 31 2019, JEP’s revenue increased by just 3.6% over the preceding year to $89 million. However, its gross margin improved to 18% from 15% in the same period. Coupled with other cost savings, JEP’s earnings nearly trebled to $6.5 million from $2.2 million.
Year to date, shares in JEP have tumbled 17% to close at 20 cents on June 24. At this level, JEP is trading at just 12.6 times earnings and values the company at $82.4 million.
Busy Dolphin
One of JEP’s subsidiaries is format precision engineering firm Dolphin Engineering. While other subsidiaries have slowed down operations, Luong says this one is “kept busy”.
That is because as one of the “top 10” suppliers in the industry, JEP is replacing some of the precision engineering companies that have gone bust due to the pandemic.
Luong claims that customers like to turn to “younger, healthier” suppliers like JEP which has a better chance of surviving the economic downturn compared to certain suppliers in the US or Europe.
“Any company that cannot survive during the virus pandemic will never come back. Their work will go to companies that are still standing strong in the industry,” says Luong.
In fact, customers’ enquiries at JEP have increased. “Right now, we’re doing a lot of quotations,” says Luong. “Dolphin has been taking on all these additional orders to make up for lower profits in the aerospace sector.”
This year alone, JEP has invested $5 million on new equipment to keep up with demand and technological changes, and to place the company in a better position when the rebound happens.
Essential services
As for UMS, Luong says the company is “working around the clock”.
“We are producing according to customer demands but we have additional capacity to accept more orders,” explains Luong. “For the rest of the year, UMS will be kept busy unless something changes.”
UMS, which owns 40% of JEP, is seeing higher sales across all its key markets for the quarter due to “robust improvement in customer demand”. In particular, Singapore and Malaysia saw 27% and 25% higher sales.
Luong says this is not a one-off surge in demand as UMS provides “essential services” and remains exempted from lockdowns in both countries.
In 1QFY2020 ended March, UMS reported earnings of $10.7 million, some 53% higher a year ago. The improved bottom line came on the back of a 22% increase in revenue to $34.9 million due to higher contributions across its business segments — semiconductor and others.
Tighter cost management also helped. For the past 15 years, the company has been gradually moving its operations from Singapore to Malaysia to save costs. As of June, Luong says 15% of the company’s operations are in Singapore, while the remaining 85% is in Malaysia.
Yet, Luong is not about to use the pandemic as an excuse to shift operations fully to Malaysia. That is because he needs to have an operational presence in Singapore so parts can be transported quickly to local customers. “If we move to Malaysia fully, we could probably save a couple of million per year. But I have to feed products to local customers on a daily basis, so we cannot afford to cut down on operations in order to move,” he says.
Minimal disruption
While the pandemic has brought many companies in the semiconductor and electronics industries to a standstill due to disruptions in cross-border supply chains, Luong says the supply chains of UMS and JEP are intact as it practises buying materials six months in advance, in anticipation of customer orders and demands.
“If suppliers indicate it may take longer to supply us, we have to increase the order instead to nine months in advance,” says Luong, adding that some of its subsidiaries have enough inventory to last them through 2021. “Since we buy ahead of time, our losses will be minimised,” he adds.
Apart from advance purchasing, UMS also has a subsidiary that sells the raw materials it uses. For instance, the company handles its own distribution of internal special processors without the need for third-party deliveries.
This “vertical integration” of company operations, Luong says, has resulted in “minimal impact” on the company.
Nevertheless, there is a demand-side risk UMS has to wary of. The company relies almost solely on Applied Materials (AMAT), the US-listed maker of capital equipment, for practically all its revenue.
However, Luong has no plans to diversify its customer base just yet.
“UMS has been a pioneer in the industry for so long. Even if you look at it as there being only one customer on the surface, there are not many companies who can work with AMAT. There are only about three companies left in the world who can deliver what AMAT needs,” he says.
Moreover, it would take lots of money to change its equipment to serve other customers. “We’re not like a car factory where it costs just $50,000 to change an equipment,” quips Luong. “For us, it costs $5 million to change just one equipment.”
At a time when companies were conserving cash and opting out of paying dividends, UMS has declared a 1.0 cent tax-exempt interim dividend for 1QFY2020, double that of the 0.5-cent dividend paid out last year. Luong says as the group has no debt and enough cash to fund its internal needs, this is the “best time to reward shareholders”.
Year to date, shares in UMS have fallen 12.5% to close at 94 cents on June 24, giving it a P/E of 13.6 times historical earnings and a market cap of $506.9 million.
“UMS creating enough cash and capital to reward shareholders is a good indication that we are healthy and not impacted badly by Covid-19,” says Luong. “Looking ahead, we see ourselves continuing to generate good revenue and income.” E