A taxing issue
? FY21 pretax profit was in line with our expectations but net profit at 82%/83% of our/Bloomberg consensus was below expectations due to higher taxes.
? Key downside risks for FY22F are higher raw material costs (aluminium) and higher effective tax rate.
? Reiterate Add with an unchanged S$1.63 TP as UMS FY22F EPS could potentially grow 37% yoy, in our view.
4Q21 hit by higher taxes
FY21 revenue grew 65% yoy to S$271.2m and was above our/Bloomberg consensus full year expectations at 108%/110% of full-year forecasts. 4Q21 revenue grew 98% yoy to S$87.3m and was up 29.1% qoq. FY21 net profit grew 46.0% yoy to S$53.1m and was below our/Bloomberg consensus’ full-year expectations at 82%/83% of full-year forecasts. This was due to a sharp rise in taxes to S$15.2m in 4Q21 leading to a fullyear tax charge of S$21.8m. Although we factored in a higher tax rate assumption given
the expiry of the pioneer tax incentive for one of its Malaysian subsidiaries, its 4Q21 tax rate of 67.8% and hence FY21 tax rate of 27.5% was above our full-year tax rate assumption of 12.0%. In FY20, UMS’s tax rate was 6.7%. The higher-than-expected tax rate was due to the expiry of tax incentives for a subsidiary in Malaysia, while another subsidiary was unable to comply with the stipulated local employee contribution percentage of its workforce (due to the ongoing labour crunch in Penang) which was a
requirement for pioneer tax incentive eligibility.
Management positive on FY22F outlook
UMS has guided for strong orders given that its key customer continued to provide positive guidance for FY22F. According to the World Semiconductor Trade Statistics (WSTS), global semiconductor sales are set to grow by 8.8% in 2022, to US$601bn. Management said UMS’s new Penang factory, which is scheduled for completion by endFY22F, will increase its current production capacity substantially and position the group to take on new orders from potential new customers which are expanding in Southeast Asia.
Reiterate Add
Our TP is unchanged at S$1.63 and is based on a target P/E of 14.45x (forward peak P/E multiple of 14.45x achieved in the FY16-18 net profit upcycle) on our FY23F EPS forecast. Over FY17-21, UMS traded at an average forward P/E of 10.4x and 2 s.d. above this average was 14.9x. Potential re-rating catalysts include stronger-than-expected orders for its semiconductor business, securing new customers for its new Penang plant and faster-than-expected earnings recovery for JEP’s aviation business segment. Company specific risks (see overleaf) in FY22F are a) higher tax rate if UMS is unable to enjoy its pioneer tax incentives, and b) higher raw material prices (aluminium) arising from the Russia/ Ukraine conflict.