Brokers' take: Analysts cut UMS target prices on higher tax rates

DBS Group Research and Maybank Securities have lowered their target prices on semiconductor equipment manufacturer, UMS Holdings, as they factor in higher effective tax rates into their forecasts.

In a research report on Wednesday (Mar 3), DBS analyst Ling Lee Keng maintained a "buy" call on UMS with a lower target price of S$1.70 from S$1.80 previously.

Maybank analyst Lai Gene Lih also maintained a "buy" call on the stock with a lower target price of S$1.42 from S$1.71 in a separate research report on Tuesday.

For FY2021, UMS reported a strong set of results but faced a one-off tax provision as it failed to comply with requirements to enjoy pioneer tax incentives for one of its plants in Malaysia.

Ling noted that discussion to reinstate the pioneer tax incentive is ongoing but chooses to take a "more conservative stance" to account for the worst case scenario where the company does not get the approval.

She, therefore, raised the expected tax rate for FY2022 and FY2023 to 19 per cent, up from 12 per cent previously. Net profit estimates were also reduced by 5 per cent each for FY2022 and FY2023, the analyst added.

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However, Ling still remains positive on the outlook for the semiconductor industry and expects strong order momentum to sustain in 2022.

She noted that the US 3-month semiconductor equipment billings increased 46 per cent year on year in December 2021 and has been increasing for 27 consecutive years.

The World Semiconductor Trade Statistics and IC Insights are also predicting growth in 2022, Ling added.

These recent data points reinforce DBS's positive industry view, the analyst said.

With the positive industry outlook, UMS's key customer, Applied Materials (AMAT), should benefit and this would bode well for UMS, Ling said. This comes as UMS is the key manufacturer of AMAT's metallization system, the Endura system, she added.

Additionally, UMS expects to increase its production capacity by doubling its capital expenditure in FY2022, which the analyst said paves the way for strong demand. In line with its plans, the group has a new factory in Penang scheduled to be completed by the end of 2022.

"This will substantially increase the current production capacity and position the group to take on new orders from potential new customers that are expanding in South-east Asia," Ling said.

On the back of the strong order momentum, the analyst increased revenue estimates for FY2022 and FY2023 by 10 per cent and 9 per cent respectively. UMS earnings are also expected to grow by 26 per cent in FY2022 and 12 per cent in FY2023, Ling added.

The analyst expects UMS to benefit from the positive developments in the semiconductor industry. She has pegged the target price to a peak valuation multiple of 17 times.

Like Ling, Maybank analyst Lai lowered profit after tax and minority interest (Patmi) estimates by 7-17 per cent for FY2022-23 to factor in higher effective tax rates, which resulted in a 17 per cent drop in target price to S$1.42.

Lai raised the effective tax assumptions to 20 per cent from 14 per cent to account for the tax provision. He still expects UMS to recover its pioneer status, he said.

Despite the higher tax rates, the analyst retains "buy" on the stock as order momentum is strong and the tax development appears priced in, he said. He believes the projected 5 per cent yield for FY2022 should provide support.

Lai also highlighted that as AMAT expects growth to persist in 2023, he thinks the target price, which represents an expected 15 times price-to-earnings ratio, is still a fair objective.

Shares of UMS were trading at S$1.22, up 0.8 per cent or S$0.01 as at 11.22 am on Thursday.