Boost from lower tax rate
- UMS announced that it will write back S$15.0m of tax provision in its upcoming 3Q22F results on reinstatement of its pioneer tax status.
- We estimate that this increases its FY22F EPS by 20.8% and its FY23-24F tax rate could fall to 13.0%, versus our previously assumed 18.6%.
- TP rises to S$2.17 as we now assume a lower 13.0% tax rate. Maintain Add.
S$15.0m tax writeback in upcoming 3Q22F results
On 14 Sep 2022, UMS issued a press release stating that its application for the reinstatement of the pioneer tax status for Ultimate Manufacturing Solutions (M) Sdn. Bhd. (Ultimate) has been approved by the Malaysian Investment Development Authority (MIDA). MIDA has also informed UMS of the relaxation of the employment conditions of Malaysian citizens under the Malaysian government’s 80:20 rule, whereby 80% of its employees must be Malaysians. On 22 Jul 2022, Malaysia’s Ministry of International Trade and Industry (MITI) announced the postponement of the 80:20 employment ruling to end-2024. UMS guided that it would write back about S$15m in tax provisions previously provided for in its upcoming 3Q22F results (in 2021, UMS released its 3Q21 results on 12 Nov 2021). The group will also submit another application to extend Ultimate’s pioneer tax status by another 5 years, from 2023 to 2027 (no timeline of when the Malaysian authorities will approve this application was provided). Previously, Ultimate had been granted the pioneer status tax incentive with a 100% tax exemption from income tax for a period of 10 years commencing from 11 Aug 2017 to 10 Aug 2027 by MIDA.
FY22F EPS increases 21% with tax writeback
We estimate that the tax writeback will increase UMS’s FY22F EPS forecast by 20.8% (see Fig 1). We assume that UMS’s application for pioneer tax status for Ultimate will be approved (given that UMS will work to satisfy the requirements) and UMS will be able to meet the 80:20 employment rule requirement. Hence, we now model the tax rate at 13.0% for FY23-24F (previously: 18.6%) leading to c.6.9% increase in FY23-24F EPS forecasts. On 13 Sep 2022, UMS sold 2,292,700 treasury shares for S$3,060,456.45 or S$1.33 apiece. Post this sale, UMS still has 1,457,300 treasury shares. Post this transaction, UMS’s issued capital (excluding treasury shares) increases to 669.1m, from 666.8m previously. As at end-Jun 22, UMS was in a net cash position of S$41.2m. UMS will use the sale proceeds to support its business growth.
Our TP rises to S$2.17 (as FY23F EPS increases), still based on 15.0x (2 s.d. above its Jan 2017 to Aug 2022 P/E multiple) on our FY23F EPS. The +2 s.d. valuation is backed by FY21-24F 25.9% EPS CAGR. Reiterate Add given its EPS growth potential. Re-rating catalyst: securing new customers for its new Penang plant. Downside risks are order deferments by its key customer leading to revenue and hence net profit decline.