Uchi’s registered 4Q22 core PAT of RM36.1m (+25.6% QoQ; +58.9% YoY), which brought FY22’s sum to RM120.7m (+32.5% YoY). This surpassed expectations, accounting for 107%/109% of our/consensus full year estimates thanks to stronger top-line. The group has guided for flat revenue in USD terms for FY23 on the back of the subdued macro climate. Additionally, Uchi expects 1/6 of the group's revenue will be generated from the new products categorized under the approved technology by MIDA for pioneer status and the profit from the remaining revenue will be taxable at the statutory tax rate of 24%. We tweak our tax assumption higher, and as a result our FY23/24 forecasts are lowered by - 11%/-12%, respectively. After earnings adjustment and rolling forward our valuation year to FY23 our TP decreases to RM3.38 based on unchanged PE multiple of 15x. Due to limited upside we downgrade our call to HOLD.

Surpassed expectations. Uchi’s registered 4Q22 core PAT of RM36.1m (+25.6% QoQ; +58.9% YoY), which brought FY22’s sum to RM120.7m (+32.5% YoY). This surpassed expectations at 107%/109% of our/consensus full year estimates. The results surprise was due to stronger top line. FY22 core PAT was arrived after adjusting for (i) forex gain (-RM4.1m); and (ii) gain on disposal of PPE (-RM13k).

Dividend. Declared interim dividend of 13.0 sen per share (4Q21: 11.0sen per share). The entitlement date will be announced in due course. FY22 dividend amounted to 25.0 sen per share (FY21: 20.0 sen per share).

QoQ. Top-line was fairly unchanged (-0.2%) at RM54.6m. Contribution from Europe remains unchanged (+0.1%), while Asia Pacific grew by (+66.8%). Bottom line was higher at RM36.1m (+25.6%) due to EBITDA margin expansion by +1.1ppt and lower effective tax rate (4Q22: 2.2% vs 3Q22: 2.8%).

YoY/YTD. Sales increased by +28.3% YoY/ +27.2% YTD due to healthy demand for the group’s products and services coupled with the boost from USD appreciation against RM (4Q22: RM4.3807/USD vs 4Q21: RM4.1337/USD). Sales in Europe and Asia Pacific continued in expansionary mode with a rise of +29.1% and +16.8% respectively. Core PAT expanded further by +58.9% YoY/ +32.5% YTD to RM120.7m, aided by the revenue increase coupled and EBITDA margin expansion (4.3ppt YTD).

Outlook. Baring the volatile market with geopolitical conflicts, interest rate hike and rise of global inflation, management is cautiously optimistic that the revenue will remain flat in FY23. On the tax front, note that prior to FY23, Uchi Opto was granted pioneer status by the Ministry of International Trade and Industry (MITI) for the design, development and manufacture of c.85% of its products that were exempted from income tax for a period of five years from Jan 2018 to Dec 2022. On 13 Jan 2023, Uchi announced that they expects more than 1/6 of the group's revenue will be generated from the new products categorized under the approved technology by MIDA for pioneer status and profit generated will be tax exempted. The profit from the remaining revenue will be taxable at the statutory tax rate of 24%. Thus, the effective tax rate for the current year is estimated to be higher than the preceding years.

Forecast. We tweak our tax assumption higher and as a result our FY23/24 forecasts are lowered by-11%/-12%, respectively.

Downgrade to HOLD. After earnings adjustment and rolling forward our valuation year to FY23 (from mid-FY23) our TP decreases to RM3.38 (from RM3.77) based on unchanged PE multiple of 15x. Due to limited upside we downgrade our call to HOLD (from Buy). The decent dividend yield of >5% with tendency to tilt on the high side, will act as a support of any downside risk.

Source: Hong Leong Investment Bank Research - 1 Mar 2023