Strong results marred by tax provisions
- Robust set of FY21 results; pretax profit 7% above our forecast
- Bottom line skewed by higher tax provision, on absence of tax incentives
- Outlook positive; expect strong order momentum to sustain in 2022
- Maintain BUY with a lower TP of S$1.70, to account for the higher tax rate assumptions
Investment Thesis:
Higher tax provisions due to failure to comply with requirements for tax incentives skewed bottom line. UMS Holdings (UMS) reported a strong set of FY21 results but a one-off tax provision due to the failure to comply with the requirements to enjoy the pioneer tax incentive for one of the plants in Malaysia, affected the bottom line. While this issue is still ongoing and pending discussion with the authorities, we have taken a conservative view to raise the tax rate for FY22F and FY23F to 19% from 12% previously. Thus, though we have increased our revenue projection for FY22F and FY23F by 9% and 10%, respectively, on the back of the robust demand outlook, we cut net profit estimates by 5% each year. Overall, we still remain positive on the semiconductor industry and earnings growth prospects.
Recent data points reinforce our positive industry view. SEMI expects continued double-digit growth of semiconductor manufacturing equipment sales to carry on till 2022. US semiconductor equipment billings remain strong and marked their 27th consecutive monthly increase in December 2021 (+46% y-o-y). World Semiconductor Trade Statistics (WSTS) and IC Insights are also predicting growth in 2022.
Valuation:
Maintain BUY with a lower TP of S$1.70, pegged to a peak valuation multiple of 17x. Our TP is reduced to S$1.70 (from S$1.80), still pegged to its peak valuation multiple of 17x (recorded in 2018), on FY22F earnings. This is in line with the methodology for other pure semiconductor plays in our coverage. Maintain BUY.
Where we differ:
We are more bullish and expect UMS to benefit from the positive developments in the semiconductor industry. Hence, we pegged our TP to a peak valuation multiple of 17x.
Key Risks to Our View:
Key client risk. Historically, c.90% of UMS’s average revenue has been from AMAT. Disruptions to the relationship or weakness in AMAT’s end demand could significantly weigh on UMS’s performance.