Uchi’s 1Q18 core earnings were broadly in line with expectations, accounting for 18% of our full-year estimate. We expect 2H2018 to be stronger once contribution from its new product kicks in. The 1Q18 core earnings were weaker by 8% yoy, negatively impacted by the appreciation of the RM. We take comfort in the 8% growth in revenue in US$ terms, which reaffirms our positive stance on its core coffee module business. However, with limited prospects of positive earnings surprise and further initiatives beyond the RM0.20 capital repayment due in August, we think the good news is already in the price. Hence, we downgrade the stock to HOLD with a lower 12-month TP of RM3.08.

1Q18 Core Profit Broadly in Line With Expectations

Uchi’s 1Q18 core profit of RM13.5m (-8.3% yoy) was broadly within expectations, accounting for 18% of our and street estimates for 2018. Earnings were weaker yoy due to contraction in both revenue (-3.7% yoy) and EBITDA margin (-2.1ppts yoy), predominantly impacted by the appreciation of the RM vis-à-vis the US$. Revenue in US$ terms rose 8% yoy, however, which continued to reflect the improvement in its coffee module business. Earnings fell a sharper 22% qoq due to the seasonally weak quarter and firmer RM. 1Q18 sales in US$ terms declined by 5% qoq.

Downgrade to HOLD With Lower Target Price of RM3.08

While the results were broadly in line and we leave our forecasts unchanged, we are downgrading the stock to a HOLD from Buy given the: 1) strong stock price performance over the past 12 months; 2) limited capital management initiatives post the RM0.20 capital repayment due in August 2018; and 3) PE valuations that are looking fair given dividend yields of c. 6% in 2019-2020E. We reduce our TP from RM3.48 to RM3.08, based on a lower PE target of 17x (from 20x; in line with the PE target accorded to the smaller cap technology stocks we cover, to reflect what we see as more modest earnings growth going forward) on our 2019E EPS (rolled forward from2018E).

Risks

Upside risks include better-than-expected contribution from the new product which we understand could account for up to 20% of revenue by 2020 and stronger-than-expected demand for its coffee modules. Downside risks include a stronger RM, weaker sales of coffee modules and slower-than-expected rollout of its new product, new competition and a loss of customers.

Source: Affin Hwang Research - 24 May 2018