Uchi’s 9M18 core profit of RM49 (-6.5% yoy) was within expectations. The business operation remained fairly stable and fluctuations in revenue and margins on a quarterly basis are due to the product mix and currency movements, and are not material. Contribution from the new product will only likely materialise in 2019, hence 4Q18 would also be relatively stable. Dividend yields of c.6% for 2019-20E should support the stock price especially given the sharp price volatility in the sector. Maintain Hold rating and TP of RM3.08.

9M18 Core Earnings Down 6.5% Yoy, Inline

Uchi’s 9M18 core profit of RM49m (-6.5% yoy) was within expectations accounting for 71% and 72% of our and consensus full-year forecasts, respectively. The relatively weaker 9M18 earnings were due to revenue contraction (-0.9% yoy) and a 0.5ppt contraction in the EBITDA margin. A higher effective tax rate of 6.3% vs 2.2% in 9M17 also dragged earnings lower. More importantly, 9M18 revenue in US$ terms rose 8.4% yoy driven by its major customer Jura, which we understand is gaining traction in new product segments as well as penetrating new markets..

3Q18 Core Earnings Jumped 27% Qoq

3Q18 revenue jumped 9% qoq and lifted the EBITDA margin by 7.6ppts qoq. We believe, however, that most of the margin improvement was led by currency translation (rather than a favourable product mix) due to the depreciation of the RM against the US$ during the quarter. With the current exchange rate at RM4.19/US$ vs. RM4.07/US$ in 3Q18, the earnings performance in 4Q18 should be sustained.

Maintain HOLD and Target Price of RM3.08

Maintain Hold and TP of RM3.08 (based on 17x 2019 EPS). We like Uchi’s niche positioning as a key supplier of coffee modules for Jura. Its strong margins are likely sustainable and supportive of its attractive dividend yield (6% for 2019E). 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, slower-than-expected rollout of its new product, new competition and a loss of customers.

Source: Affin Hwang Research - 26 Nov 2018