Revising EPS estimates on higher tax; D/G to HOLD
GTB’s existing tax incentives related to its “Pioneer Status” is set to expire
in June 2022. As such, we have increased its effective tax rate for FY22-
24E to 9-18% and slashed our EPS estimates by 8%-21%. Despite
undemanding valuations, we D/G GTB to a HOLD and lower our TP to
MYR1.44 (-42%), pegged to 20x FY23 PER, at -1.5SD to the LT mean. We
prefer INRI MK (BUY, TP: MYR4.00) as our top sector pick for MY OSATs.
Sensor division’s “Pioneer Status” set to expire
GTB’s management has alluded that the tax incentives currently in place
for the group’s Sensor division from its “Pioneer Status” classification will
expire on 30 June 2022. To recap, GTB had successfully applied for and
received approval from MIDA in 2017 for an extension of the division’s
Pioneer Status for a further 5 years. As a result, its effective tax rate
between FY17-21 ranged from 2.3% to 8.5%, significantly lower than the
Malaysian statutory tax rate of 24%.
Capital allowances to cushion higher tax impact
Despite the expiry of the division’s Pioneer Status next month, the group
still has unabsorbed/carried forward capital allowances that is expected
to partially shield the group’s overall tax exposure for FY22. Separately,
MIDA has also granted GTB additional investment tax allowances and a
subsidy grant for any capex investment incurred by its new product
platforms – however, these incentives are not expected to be significant.
Imputing for higher effective tax rates in FY22-24E
Considering the net impact of expiring as well as new tax incentives on
GTB’s bottom-line, we expect its effective tax rate to be at 9%/14%/18%
in FY22-24E respectively (from c.2%/3%/5% previously). We have also
adjusted its capex allocation for FY22/23E to MYR45m/35m (from
MYR30m), in line with mgmt guidance on its new product initiatives. As a
result, our core EPS estimates for FY22-24E are lowered by 8%/19%/21%.
With a 4Y (FY20-24E) core earnings CAGR of just 2.2%, we have also revised
down our valuation peg to 20x FY23 PER, at -1.5SD to the LT mean (from
27x FY23 PER, at mean) to reflect its subdued earnings growth prospects.