Uchi’s 3Q17 core profit of RM20m (+23% yoy) was its strongest quarterly earnings since 2Q07. Cumulative 9M17 earnings of RM52m (+19% yoy) were also ahead of expectations. Growth is being driven by better demand for its coffee modules. While management expects high single digit revenue growth for 2017E, 9M17 topline growth is already up 14% yoy. We believe that revenue and earnings momentum will sustain into 4Q17 and hence raise our 2017-19E earnings by 5%. Uchi also positively surprised with an interim and special DPS of 7 sen and 10 sen, respectively. As cash levels remain high at RM193m, there is scope for additional dividends ahead. Maintain BUY with a higher TP of RM3.48.

9M17 Results Above Expectations – DPS Surprise

Revenue and profits for 9M17 were ahead of our expectations (core net profit was 81% of our previous 2017 forecast and 82% of the street’s). The surprise is largely coming from better-than-expected revenue and margins. 9M17 EBITDA margin at 52.4% is ahead of our previous forecast of 51%, potentially driven by improved product mix, new product launches, cost efficiency as well as aided by the weaker RM yoy. Apart from the earnings surprise, Uchi also pleasantly surprised with an interim DPS of 7 sen and a special DPS of 10 sen totalling 17 sen vs 5 sen for 9M16.

Strong Sequential Momentum

3Q17 revenue jumped 21% qoq, the strongest improvement seen in a long while. With strong orders from its customer Jura, which we understand has been gaining market share, earnings momentum will likely be sustainable. Although 3Q17 EBITDA margin at 54.6% was softer by 1.1ppt qoq, margins have remained relatively steady and likely change according to product mix.

Maintain BUY With a New Target Price of RM3.48

Uchi’s improving earnings momentum reaffirms our positive stance on the stock that earnings should continue to recover with improved demand from its key customer Jura. We maintain our BUY rating, with a new 12-month TP of RM3.48 (from RM3.33), based on 20x 2018E EPS. Downside risks: a slowdown in global demand for automated high-end coffee machines, new competition and a loss of its customer base.

Source: Affin Hwang Research - 24 Nov 2017