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Foolish Face-Off: AEM Holdings Ltd Vs UMS Holdings Limited

When investors look at the universe of listed stocks on the Singapore Exchange, they may find it difficult to determine which sector or company is the best investment option. For investors who adopt a top-down approach and select a specific sector to look into, it may also be tough to compare two similar companies in order to discern which is the better investment.

Today, we’re looking at the electronics industry, comparing AEM Holdings Ltd (SGX: AWX) and UMS Holdings Limited (SGX: 558) in order to ascertain which is the more attractive investment right now.

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Introducing the contenders

AEM Holdings Ltd provides solutions in equipment systems, precision components, and related manufacturing services across various industries. The group has four manufacturing plants located in Singapore, Malaysia (Penang), China (Suzhou), and Finland (Lieto). UMS Holdings Limited, on the other hand, acts as a one-stop shop providing equipment manufacturing and engineering services. The group is also in the business of front-end semiconductor equipment contract manufacturing and offers modular and integrated systems for its customers.

The table below shows the market capitalisation, revenue, and profit levels for both companies. Note that the market capitalisation is as of 10 June 2019, and the revenue and profit numbers both relate to fiscal year 2018.

Source: UMS and AEM FY 2018 earnings

Round 1: Profitability

For the first round, I will be looking at the profitability of each company in terms of their gross margin, net margin, and ROE. The ROE is important as it tells us how effective management is in converting every dollar of capital into profit.

Source: AEM and UMS Q1 2019 earnings

From the above table, we can see that UMS has a higher gross margin when compared to AEM, which may indicate that UMS has better pricing ability. UMS’s net profit margin is also almost twice that of AEM, showing that it has a very efficient cost base that allows it to convert each dollar of revenue into profit. However, ROE is significantly higher for AEM compared to UMS, as AEM generates its profit on a smaller capital base.

Winner: AEM

Round 2: Growth

The next round looks at the year-on-year growth in both revenue and net profit for both companies.

Source: AEM and UMS Q1 2019 earnings

Both companies suffered year-on-year falls in revenue and net profit as the electronics cycle turned down due to the US-China trade war. However, AEM’s fall was less severe in magnitude than UMS’s. UMS also saw a larger fall in net profit as compared to revenue — probably due to its high operating leverage.

Winner: AEM

Round 3: Valuation and dividend yield

The final round looks at the valuation of each company and their dividend yields.

Source: AEM and UMS Q1 2019 earnings

AEM is trading at a slightly cheaper valuation than UMS, despite having a higher ROE. However, the dividend yield is lower at 3.2% versus 6.3% for UMS. In addition, AEM pays a twice-yearly dividend while UMS pays a quarterly dividend, so investors would benefit more from UMS in terms of income flow.

Winner: UMS

The Foolish conclusion

AEM is the winner here as the group has won two out of the three rounds. Of course, this is a simple exercise comparing just a few aspects of both companies. Investors should carefully study other financial metrics — and also the prospects and plans for each business — before committing their capital.

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of AEM Holdings Ltd. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.