• UMS's 4Q21 missed expectations after net profit of S$5.7m (-31.4% y-o-y, -62.5% q-o-q) 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’s key client’s orderbook.

UMS's 4Q21 Results Hit by Unprecedented Taxes

• UMS (SGX:558)’s 4Q21 net profit of S$5.7m (- 31.4% y-o-y) 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 UMS's 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, UMS's 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 (SGX:1J4). 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 y-o-y at 52.1% (4Q20: 53.5%, 3Q21: 54.4%), helped by good cost management from UMS’s 70% ownership in aluminium alloy products manufacturer, Starke Pte Ltd.
• Additionally, UMS raised its final dividend to S$0.02 (4Q20: S$0.01), bringing full-year payout to S$0.05 (2020: S$0.04).

Factory Utilisation Rate to Stay High in 2022-23

• Our view is for factory 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.

UMS - Earnings Forecast Revision & Recommendation

• In tandem with expectations for a full ramp-up of production at the new site in Penang after lowering our earnings estimates. The target price remains pegged to 15.5x 2022F earnings, or +2 standard deviation above its historical five-year average.

• Catalysts include:
  • Higher-than-expected factory utilisation rates.
  • Return of orders for aircraft components to benefit recently-acquired subsidiary JEP Holdings.
  • Better-than-expected cost management.

Source: UOB Kay Hian Research - 3 Mar 2022