We walked away from the meeting feeling confident about the group’s prospect moving forward. Despite the reduction in the manufacturing operations due to FMCO, management does not expect this to have any significant impact on the productivity. Excluding FMCO mandate of 60%, the utilisation rate for Malaysia and China operations are healthy at 85%/75%, respectively. Order outlook from its customers appears to be robust for both Art of Living and Biotech segments and management has guided for high single digit revenue growth in USD for FY21 (from low single digit previously). Maintain BUY, with unchanged TP of RM3.83 based on PE multiple of 19x pegged to FY22 EPS.

We had a meeting with management recently and walked away feeling confident about the group’s prospect moving forward.

Expect minimal impact from FMCO. With the recent implementation of Full Movement Control Order (FMCO; 1-28 June), Uchi has been allowed to operate albeit at a reduced capacity of 60%. From what we gather, the group has taken the necessary measure in reducing the workforce on site by arranging for non-operational employees to work-from-home. Despite the reduction in the manufacturing operations, management does not expect this to have any significant impact on the productivity. Excluding FMCO period, the utilisation rate for Malaysia’s operation is healthy at >85%, while China is operating at <75%.

Benefiting from strong end demand in indispensable business. Despite many other businesses feeling the brunt from the pandemic, we are comforted to know that that Uchi is still expecting a healthy order pipeline for both Art of Living and Biotech segments. With the pandemic inducing a “new normal”, consumers are increasingly switching to home-brewed alternatives. Additionally, with Customer J’s recently launched coffee machine with cold brew option, we expect demand to remain elevated buoyed by the rising popularity of chilled brews. Note that this is the first of its kind to offer cold brew with a touch of a button.

Supply chain delay mitigated. With supply chain disruptions in light of raw material shortages, high freight cost and port congestion, the group has taken necessary efforts in mitigating the issues by (i) increasing safety buffer stock (safety stocks are kept for a long lead time components to facilitate smoother operations taking into account of obsolesce concerns), (ii) reviewing alternative supply sources and (iii) working closely with suppliers and customers.

Outlook. Despite Covid-19 headwinds, we are impressed by the group’s resilience in maintaining revenue growth trajectory. To recap, Uchi reported 1Q21 results with revenue of RM39.6m (-26.1% QoQ; +11.4% YoY) and core PAT of RM20.6m (-35.7% QoQ; +28.2% YoY). Commendable YoY performance was recorded despite the 10- day temporary production halt due to positive Covid-19 cases. Note that this was the highest 1Q revenue recorded despite being the seasonally weaker period for the group. Management has guided for a high single digit revenue growth in USD for FY21 (from low single digit previously) driven by strong demand from its customers. With dividend yield of c.6%, Uchi remains an attractive stock as we opine the demand for its coffee machines to remain robust taking cue from its main Customer J’s active expansion into new markets.

Forecast. Unchanged.

Reiterate BUY, with unchanged TP of RM3.83 based on PE multiple of 19x pegged to FY22 EPS. We like Uchi for its (i) stable earnings drivers for 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) business commanding higher margin vs peers; and (iv) decent dividend yield of ~6% with tendency to tilt on the upper side, acting as an support of any downside risk.

Source: Hong Leong Investment Bank Research - 17 Jun 2021