• 4Q23 came in above expectations due to sustained strong US$ revenue

• We believe its key customer in the coffee machine industry should anchor 7-

• We raise FY24-25F EPS by 26-30% following the stronger-than-expected performance. Reiterate Hold, given its defensiveness and 6-7% yields.

4Q23 results above expectations

Uchi Technologies’ (Uchitech) 4Q23 core net profit rose by 15% yoy, on the back of strong revenue growth and higher margins, which more than offset the higher effective tax rate. US$ revenue grew by 14% yoy in 4Q23, on the back of higher volumes and introduction of higher-priced SKUs from its Customer A, with the higher-priced SKUs also contributing to the higher EBITDA margin of 65.8% in 4Q23 (vs. 57.9% in 4Q22). Effective tax rate in 4Q23 was 18% (vs. 2% in 4Q22) due to the expiry of tax incentives for most of its products since end-FY22. On a full-year basis, core net profit rose by 2% to RM123.5m and exceeded both our and Bloomberg consensus’ estimates by 12% and 17%, respectively. A third interim dividend of 5 sen was declared during the quarter, bringing FY23 DPS to 22 sen, but we do not discount the possibility of a special dividend that may be announced in Apr 2024 (as the group did in Apr 2023 for FY22). The 22 sen DPS translates into a payout of 73% of FY23 headline net profit, which is lower than FY18-22’s average payout of 93%.

Sticking with its key customer’s growth

We believe Uchitech will primarily allocate its resources to provide electronic control modules for Customer A. We understand that the group is involved in more than 10 SKU projects at the moment, indicating a healthy orderbook pipeline as demand for automated coffee machines continues to grow in key markets such as Europe and the US. We raise our FY24-25F EPS by 26-30% and introduce FY26F estimates. This is based on our revised assumptions of US$ revenue growth of 7-8% in FY24-26F, in tandem with the 10- year revenue CAGR of its key customer (Fig 4). We also raise our EBITDA margin assumption to 63-64% (from 59-60% previously), to account for an improved product mix and economies of scale.

Reiterate Hold, with a higher TP of RM4.30

We believe Uchitech’s strong FCF yields in excess of 8% should anchor generous payout levels of c.90%, translating into yields of >6%, the highest in the sector. Valuations also appear reasonable at 13.3x FY24F P/E, which is within its six-year mean of 14.0x. However, Uchitech provides just single-digit EPS growth ahead, which is less appealing vs. other tech stocks with higher EPS growth. Hence, we reiterate Hold on Uchitech, with a higher GGM-derived TP of RM4.30. Upside/downside risks include higher-/lower-than- expected demand for its Art-of-Living and biotechnology products, higher/lower effective tax rate, as well as weakening/strengthening of the ringgit against the US dollar.

Source: CGS-CIMB Research - 28 Feb 2024