SAC Capital’s Lim Shu Rong has maintained her “hold” rating on UMS Holdings, but has lowered her target price sharply from $1.80 to $1.39.
Lim says this was due to UMS’s pioneer tax status being revoked in Malaysia, after it failed to meet the minimum 80% local labour requirement in the country.
The pioneer tax incentives for one of its Malaysian companies had expired during the year, while another Malaysian subsidiary was unable to comply with the stipulated local employee criteria to achieve the pioneer tax incentive.
This was due to an ongoing labour crunch in Penang, said UMS.
In an April 4 note, Lim notes that for UMS, this labour shortage is a headwind, because, in addition to losing its pioneer status, the utilisation rate of its equipment is currently below optimal levels, although JEP’s consolidation has helped to mitigate the impact on its components production volume.
UMS is currently appealing to reinstate its pioneer status, but if their appeal is unsuccessful, UMS will also be subjected to a prosperity tax of 33% for the remaining chargeable income in excess of RM100 million ($32.2 million).
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Lim says that as such, “we are factoring in higher tax costs, especially in FY2022 going forward until we have clarity on the appeal result”
She does note that applications for employment of foreign workers for manufacturing has opened on Feb 15, and has seen over 193,000 applications by March 16.
However, the manufacturing sector needs 600,000 workers to bring production back to pre-pandemic levels, she says.
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Therefore, any improvement in labour supply depends on the speed to bring in workers and process their applications, with Lim expecting the labour shortage to fill up in 2HFY2022.
Separately, Lim points out that the Russia-Ukraine conflict has caused metals’ prices to soar, with aluminium hitting record high prices of US$3,849 ($5,220) per tonne in early March.
To date, prices have been up 58.45% y-o-y, to which Lim thinks UMS could see input costs trend higher, and substitution may take place to protect margins.
On the bright side, UMS’s major customer Applied Materials is fully booked for this year, affirming the demand for UMS’s components and services for the year.
Lim raises her FY2022 topline estimate by 6%, but lowers her PATMI forecast by 22% to account for a higher tax rate of 27%. Should the appeal be successful, she does see upside to UMS’s target price.
For the FY2021 ended December, UMS reported a surge in earnings to an all-time high of $53.1 million, up 46% y-o-y. The figure, however, still stood 21% lower than the brokerage’s full-year estimates. Revenue also stood at an all-time high of $271.2 million, up 65% y-o-y, and 10% above SAC’s estimates.
UMS had revealed in its FY2021 earnings report that income tax expense also jumped 739% in FY2021, due to higher profits, but also higher tax provisions for its Malaysian entities which did not benefit from pioneer incentives enjoyed previously.
As at 3.04 pm, shares of UMS were trading at $1.23, with a FY2022 P/B ratio of 2.7x and dividend yield of 4.2%.
