Uchi is a renowned original design manufacturer (ODM) of electronic control modules. We like Uchi for its (i) stable earnings drivers being the sole supplier and R&D partner for its customers, (ii) involvement in indispensable market of coffee and biotech division that could serve as future catalyst in this pandemic era, (iii) commanding higher margin vs peers and (iv) decent dividend yield of ~5%. We initiate coverage on Uchi with a BUY rating with TP of RM3.83, pegged to 19x PE on FY22 EPS.

One-stop solution. Uchi is the one-stop solution provider that offers a wide spectrum of services that range from R&D, tools design and set up, and engineering support to the production of finished electronic control systems for household appliances (e.g. fully and semi-automated coffee machines) and appliances for office services sector (industrial scale, professional iron station, etc). Most of Uchi customers are MNCs, each positioning themselves as market leaders in their respective industries. The qualifying process and criteria selection are very stringent with high barriers to entry, hence enabling Uchi to monopolize as the sole supplier for its clients.

Key in R&D. Uchi galvanized its position as the sole supplier by contributing in the early stage of product development. The group works together with customers in designing and R&D stage while at the same time, signing a non-disclosure agreement to protect information from being publicized. Uchi earns a fee by conducting research on new products on behalf of clients and recognizes the revenue once the designs are approved by clients. In this regard, it could be viewed as the outsourced R&D partner for the MNCs appliance brand owners.

Robust coffee machine demand. Based on Grand View Research, global coffee machine market size (a key client end product contributor to Uchi’s revenue; 85% in FY20) is anticipated to reach USD7.6bn by 2025 (CAGR: 3.7%).

Biotech could serve as future catalyst in this pandemic era. One of the products in Uchi’s pioneer status list is the ultra-low temperature and mass sensing control system. This device is designed for the storage of biological materials (such as virus, bacteria, eukaryotic cells, stem cell and blood) mainly used in blood banks, hospitals, epidemic prevention services, research institutes and biomedical facilities.

High margin business. Due to Uchi’s unique business model coupled with the pioneer status, it enjoys a consistent core profit margin of above 45% since FY15. Management shared that even in a weak economic environment, the group is aiming to sustain at an operating profit margin of 40%, provided that the forex remains favourable of at least RM3.90/USD.

Generous dividend payout. Uchi has a dividend payout policy of minimum 70%. However, the group has been consistently paying out on average close to 92% (average yield of 5%) as dividends. Still, we are taking a conservative stance and assume only an 88% payout, translating to DPS of 17.0-18.7 sen for FY21-23. As of 4Q20, Uchi sits on a net cash position of RM156.7m (NCPS: RM0.35) with no borrowings on its book.

Initiate coverage on Uchi with a BUY recommendation and TP of RM3.83, pegged to 19x of FY22 EPS. This valuation multiple is roughly +1.5SD above the 5-year historical mean P/E of 15x. We like Uchi for its (i) stable earnings drivers being the sole supplier and R&D partner for its customers, (ii) involvement in indispensable market of coffee and biotech division that could serve as future catalyst in this pandemic era, (iii) commanding higher margin vs peers, and (iv) decent dividend yield of ~5% with tendency to tilt on the high side leading to support of any downside risk.

Source: Hong Leong Investment Bank Research - 22 Mar 2021