4Q21: Tax Shocker Resulted In A Miss
4Q21 missed expectations after net profit of S$5.7m (-31.4% yoy, -62.5% qoq) was hit by an unprecedented tax bill as the Malaysian subsidiary did not qualify for the Pioneer Status. Nevertheless, revenue marked a quarterly and annual record from sustained growth in the global semiconductor industry. The outlook remains bright with clear revenue visibility stemming from UMS’ key client’s orderbook. Maintain BUY with a lower target price of S$1.45, after incorporating higher costs and taxes in 2022-24.
RESULTS
• 4Q21 hit by unprecedented taxes. UMS Holdings’ (UMS) 4Q21 net profit of S$5.7m (- 31.4% yoy) was dragged by a tax shock of S$15.2m, consisting of an unexpected S$7.6m, incurred after the company was not granted Pioneer Status for an incentive at the Malaysian subsidiary. Our understanding on the unprecedented tax bill is that UMS met all but one criterion under the scheme – it was unable to hire a minimum percentage of the local workforce in Penang due to the tight labour market. UMS is still working with the Malaysian Investment Development Authority to review the situation. While 2021 net profit gained 22.1% to S$53.1m, it was insufficient to meet our estimates.
• Record revenue marked in 4Q21 and 2021. Nevertheless, 4Q21 and 2021 revenue marked a quarterly and annual record in corporate history since its founding in 2005. This was achieved on the back of sustained strong growth in the global semiconductor industry and from the consolidation of JEP Holdings. Segmentally for 2021, component sales leapt 84% to S$138.5m while integrated systems sales grew 34% to S$104.2m.
• Gross profitability stable, dividend raised. 4Q21 gross material margin held relatively stable yoy at 52.1% (4Q20: 53.5%, 3Q21: 54.4%), helped by good cost management from the Group’s 70% ownership in aluminium alloy products manufacturer, Starke Pte Ltd. Additionally, UMS raised its final DPS to 2 S cent (4Q20: 1 S cent), bringing full-year payout to 5 S cent (2020: 4 S cent).
STOCK IMPACT
• Factory utilisation rate to stay high in 2022-23. Our view is for factory utilisation levels at the downstream semiconductor manufacturers, including UMS, to stay elevated in 2022-23. Specifically for UMS, the order backlog for AMAT’s Semi Systems segment has risen consecutively in all four quarters of 2021, providing revenue visibility for UMS into 2022-23. To take advantage of the secular growth, UMS’ new site in Penang will add 300,000 sf, or 60%, to the current capacity of 500,000 sf. Construction is expected to be completed in 3Q22, and we expect full production to come on-stream in the later part of 2023.
• Solid FCF generation. Positive operating leverage is expected to lift forward earnings, and free cash flow (FCF) generation is anticipated to remain strong. In 4Q21, UMS achieved net operating cashflow of S$21.1m (3Q21: S$16.1m) and free cash flow of S$17.8m. (3Q21: S$13.0m), which brought 2021 net operating cashflow to S$66.1m and free cash flow to S$56.1m. Our estimates suggest a continued increase in FCF in 2022 and 2023 to S$44.8m and S$60.5m respectively, and S$59.1m in 2024.
EARNINGS REVISION/RISK
• In tandem with expectations for a full ramp-up of production at the new site in Penang, we have adjusted our 2024 revenue growth assumption from 2% to 12%.
• Assumptions for labour cost inflation are increased in view of the tight environment in Malaysia from 2% per year to 12% per year. The cost component now constitutes 13.5% of revenue, from 6.9-8.1% previously.
• Additionally, a higher tax rate of 17.1% is incorporated for 2022, and 22.3% for both 2023 and 2024 (from 11.2% previously), taking a view that there will not be any further incentives from the Pioneer Status in Malaysia going forward.
• Accordingly, net profit estimates have reduced by 20%, 27% and 22% to S$62.2m, S$62.4m and S$67.8m for 2022-24 respectively.
VALUATION/RECOMMENDATION
• Maintain BUY with lower target price of S$1.45 (from S$1.80), after lowering our earnings estimates. The target price remains pegged to 15.5x 2022F earnings, or +2SD above its historical five-year average.
SHARE PRICE CATALYST
• Higher-than-expected factory utilisation rates.
• Return of orders for aircraft components to benefit recently-acquired subsidiary JEP Holdings.
• Better-than-expected cost management.