KUALA LUMPUR (June 20): CGS International has upgraded Uchi Technologies Bhd (KL:UCHITEC) to 'add' at RM3.95, with a higher target price (TP) of RM4.71 (from RM4.30), and said the 'premiumisation' of coffee consumption is a secular trend that will continue to shape consumer behaviour, benefiting Uchi going ahead.

In a note on Wednesday, the research house said Uchi’s position as a key supplier of electronic control modules for its main customer, which formed about 80% of its total revenue as of the financial year ended Dec 31, 2023 (FY2023), should drive the group’s revenue at a three-year compound annual growth rate (CAGR) of 5.5% in FY2023-26.

“Presently, the group said it is engaging in around 20 projects across various stages of research and development for its art-of-living and biotechnology segments, with around one-third slated for mass production in FY2024.

“Between FY2020 and FY2023, the group managed to notch an earnings per share (EPS) CAGR of 14.7%, driven by both a revenue CAGR of 12.9% and an increasing earnings before interest, taxes, depreciation and amortisation (Ebitda) margin, the latter due to a higher mix of high-margin stock-keeping units (SKUs).

“We believe the group should be able to sustain its Ebitda margin level at 62% to 64% in FY2024-26, as its new SKUs are skewed towards higher-end products. Overall, we forecast an EPS CAGR of 7.9% in FY2023-26,” it said.

CGS upgraded Uchi from 'hold' to 'add', with a higher Gordon growth model-derived TP of RM4.71, saying the stock will benefit from sustained growth in automated coffee machine demand while offering sector-high dividend yields of 6% to 7% at attractive valuations.

“The stock is trading at an attractive 12.1 times FY2025 price-earnings, which is below its six-year historical average of 14 times, with a strong net cash balance sheet and free cash flow yield in excess of 7% that will support its strong dividend payout of at least 90% (versus a 95% average payout in FY2018-23),” the research house said.