Tuesday 18 Jun 2024
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This article first appeared in The Edge Malaysia Weekly on January 31, 2022 - February 6, 2022

AMID the pandemic, Penang-based Uchi Technologies Bhd has managed to maintain a trio of factors that makes the stock appealing to investors — a steady growth in profitability, a strong cash buffer and a decent stream of dividends.

An original design manufacturer (ODM) of electronic control systems that are used in fully automated coffee machines, precision weighing scales, centrifuges and deep freezers, the group derives 97% of its revenue from Europe, with Switzerland being its highest contributor.

For the nine months ended Sept 30, 2021 (9MFY2021), Uchi reported a 32% year-on-year increase in net profit to RM68.1 million, on the back of a 24% increase in revenue to RM125.98 million. Net profit margin was at 54% in 9MFY2021, from 51% in 9MFY2020.

Private investor and former investment banker Ian Yoong is of the view that the high net profit margin points to Uchi being a price maker.

“A price maker is a business that has pricing power. Uchi’s customers either have difficulty securing alternative electronic control systems, or are very satisfied with dealing with Uchi. [This is evident from] Uchi keeping its customer reject rate below 0.2%, [with a rate of 0.13%] reported in 2020. Its on-time shipment performance was an impressive 84.5%,” he tells The Edge.

One of the reasons Uchi enjoys a high profit margin is the pioneer status granted to Uchi Optoelectronic (M) Sdn Bhd, a subsidiary of the company, for five years commencing from Jan 1, 2018.

The company enjoys tax exemptions for income derived from the design, development and manufacture of real-time centralised energy measurement and control systems, high precision hot fluid temperature control systems and ultralow temperature and mass sensing control systems for bio-chem equipment.

As at Dec 31 last year, Uchi had RM1.24 million in unused reinvestment allowances, which are available to be offset against future taxable income.

From an investment perspective, Yoong says Uchi ticks most of the boxes for an upside in its share price, as it trades at an attractive earnings multiple of 13 times based on its FY2022 forecast, a net profit margin of 54% and a return on equity of 47%.

“Uchi has [also] consistently achieved its commitment to distribute at least 70% of its net profit as dividend, since 2003. The dividend payout ratio was 91% in 2020. For FY2022, Uchi has a very attractive dividend yield of 6%.

“Negatives are its low growth in revenue — revenue grew 33% from FY2016 to FY2020 — and we do not anticipate stellar growth in revenue and earnings in the short term,” says Yoong.

Throughout the years, Uchi has managed to maintain a healthy balance sheet. As at Sept 30 last year, the group had cash of RM155.75 million, with nil borrowings.

HLIB Research equity research analyst Syifaa’ Mahsuri Ismail also expects further upside from Uchi, on the back of robust demand for the group’s products and services.

“We laud the group’s performance in maintaining [a profit] growth trajectory with a resilient pace of revenue increase. In its last reported results of 3QFY2021, the group staged a commendable showing of core profit increase despite the 60% operation constraints during the Phase 1 [Movement Control Order] restrictions.

“Additionally, management has guided for high-single-digit revenue growth in US dollars for FY2021, buoyed by strong demand from the Art-of-Living segment. We also expect the demand for automatic coffee machines to remain elevated, supported by its main customer’s relentless expansion into new markets,” she tells The Edge.

The group’s Art-of-Living product group primarily comprises fully automated coffee machines for household and professional use. Its main customer is a European premium coffee machine maker that accounts for more than 70% of its revenue contribution.

According to a report by Allied Market Research, the global coffee maker market was valued at US$3.8 billion in 2019 and is anticipated to reach US$5.1 billion by 2027, with a compound annual growth rate of 6.3% during the forecast period.

In the past, concerns have been raised about Uchi being subject to single market exposure, given its large concentration in Europe. However, Syifaa’ does not see this as a concern.

“I’m not concerned with the single market exposure. Uchi has established a strong footing and it is fully engaged in the manufacturing division as the main business activity. The company provides one-stop complete ODM solutions to world-renowned customers mainly from Europe, such as Switzerland, Portugal and Germany.

“Uchi’s in-house research and development team works very closely alongside its clients through designing and developing electronic control modules, which the group also manufactures and assembles as components into semi-finished parts and control modules. Being involved in the whole process as the sole supplier for the main customer, I opine that customer stickiness should alleviate this concern,” she says.

HLIB has a “buy” call on Uchi, with a target price of RM3.83, or an upside of 32% to Uchi’s closing price of RM2.91 last Thursday.

Inter-Pacific Research also has a “buy” call on Uchi, with a target price of RM3.33. In a report published in November last year, the group said Uchi’s outlook remained stable as demand from its European key client has stayed strong.

“Although the pandemic risk in Europe has remained elevated due to a resurgence of Covid-19 cases lately, we do not expect this to hamper the group’s earnings much as home coffee consumption jumped from 73% to 81% versus food service consumption during the pandemic, according to market research findings,” the firm says.

Interpac adds that Uchi’s interim dividend of nine sen per share for FY2021 was higher than that of its last two financial years, which ranged from 7.5 sen to 8.5 sen per share.

“We deem this as a good sign that the group might be able to offer a total dividend of 18 sen per share in the current year, equivalent to a dividend payout of about 89%,” says Interpac.

Diversification in the game plan

When contacted by The Edge, Uchi says the diversification of its products and customer base are in the game plan for the group going forward.

“Our major customers have [been around for more than] 100 years and are leading players in their respective specialised markets. Uchi Group appreciates what we have cultivated — turning customers into partners. In the current volatile economic situation, our goal is clear in that, on the one hand, we are committed to our precious partnerships through our continued innovation and competitive solutions, in order to maintain our clients’ leading edges in their markets.

“On the other hand, we are also developing new customers using our technical competitiveness. However, we must find the right targets or we may lose what has made Uchi special for the past 30 years in terms of good financial performance,” the group says.

Almost 100% of Uchi’s revenue is denominated in US dollars. The US dollar is widely expected to appreciate this year given anticipated interest rate hikes by the US Federal Reserve, and this could provide a boost to Uchi’s financial performance.

“Barring any unforeseen circumstances, it is reasonable to believe a stronger US dollar could result in better financial performance. Uchi’s revenue is almost 100% in US dollars, and a certain percentage of which will be allocated as a natural hedge for US dollar expenses,” the group says.

The group, like other electronics industry players, was impacted by the disruptions in the global supply chain.

“In order to mitigate the risks it has caused, Uchi has been taking great measures to increase our safety buffer stocks, source resourcefully, reroute transportation for logistics, and work very closely with customers and suppliers.

“Although [the pandemic] has devastated many industries, there are those that have seen increased demand during this difficult time. In 2021, we had a stronger seasonality than in recent years, as announced previously, and we expect to have a high-single-digit growth in revenue in US dollars compared to that of FY2020.

“This is partly because Covid-19 has popularised work-from-home and stay-at-home lifestyles as well as the requirement of essential equipment, causing a higher demand for our customers’ products. As an ODM company in a niche market, Uchi has never been short of obstacles in our 30-plus-year history. We believe it is crucial to maintain our technical strengths as well as our financial security to navigate these challenges,” the group says.

Uchi’s share price has appreciated by 14% over the past year to RM2.91 last Thursday, valuing the company at RM1.3 billion.

 

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