This article first appeared in The Edge Financial Daily, on November 24, 2015.

Uchi Technologies Bhd
(Nov 23, RM1.70)
Maintain hold call with a higher target price (TP) of RM1.90. We maintain our “hold” rating on Uchi, predominantly on its expected dividend yield of 6%. 

We raise our 12-month TP to RM1.90 from RM1.38, based on a higher price-earnings ratio (PER) of 14 times of our estimated 2016 earnings per share (EPS). 

Our target multiple represents a 20% discount to our FBM KLCI target PER. 

Downside risks include a high dependency on a few customers and weak demand. Upside risks include better-than-expected demand and new product launches.

Another beneficiary of the strong US dollar, Uchi reported a strong nine-month ended Sept 30 of financial year 2015 (9MFY15) revenue of RM82 million. 

The 9MFY15 net profit correspondingly grew 8% year-on-year (y-o-y) to RM34 million on the increase in revenue as well as the strengthening of earnings before interest, taxes, depreciation and amortisation (Ebitda) margin to 50.7%. 

After stripping off exceptional items, comprising largely unrealised losses on derivatives, Uchi reported a stronger 9MFY15 core profit of RM40 million. 

This was above expectations, accounting for 93% of our 2015 forecast (83% of consensus). 

The discrepancy with our forecast lies largely in our US dollar assumption, which we have subsequently tweaked. We thus raise our 2015 to 2017 EPS forecasts by 10% to 21%. 

Sequentially, Uchi reported a weaker third quarter of FY15 (3QFY15) headline net profit of RM10.9 million due to unrealised derivative losses. 

Excluding this, core earnings rose 24% quarter-on-quarter to RM15 million. Again, the strong US dollar played a big role, as revenue in US dollar terms rose a marginal 1.2%. 

Meanwhile, 3QFY15 Ebitda margin hit a high of 55.1%, its highest level since 4QFY06. 

However, unless the ringgit remains at current levels, we do not think this will be sustainable. 

In US dollar terms, Uchi’s 9MFY15 revenue grew at a modest 0.9% y-o-y. 

We continue to believe that this is reflective of the weak European economy, where the bulk of its revenue is derived from. 

To recap, Uchi’s products cater to the high-end segment of the automated coffee machine market. 

Likewise, demand from its biotech equipment segment also remains fairly stable. New-product launches have also not been forthcoming. — AffinHwang Capital Research, Nov 23