Uchi’s 2018 core profit of RM67m (-4% yoy) was within expectations. Full-year DPS of 14sen or a payout ratio of 91% has kept Uchi’s dividend yield story intact. Maintain Hold rating but with lower TP of RM3.02 (based on 17x 2019E EPS).

2018 Core Earnings Down 4% Yoy, Within Expectations

Uchi’s 2018 core profit of RM67m (-4% yoy) was within expectations, accounting for 97% and 99% of our and street 2018 forecasts. Overall, the weaker earnings were largely due to the 6% appreciation of the RM against the US$. This also partially impacted the 2018 EBITDA margin, which declined 0.7ppt yoy to 51.2%. In US$ terms, sales rose 9.5% yoy as growth continues to be led by its major customer Jura. Uchi announced a final DPS of 7sen or full-year DPS of 14 sen, approximating a payout ratio of 91%.

4Q18 Core Earnings Lower by 8% Qoq

Although revenue was higher sequentially, earnings fell largely on the back of lower margins qoq. This was nevertheless due to the exceptionally high base in 3Q18, although margins have normalized during the fourth quarter.

Maintain HOLD But With Lower Target Price of RM3.02

We trim 2019-20E EPS by 2-3% after tweaking our forecast for the full-year results and also to reflect the delays in the new product. Maintain Hold but with a lower TP of RM3.02 from RM3.08 (based on an unchanged 17x 2019E EPS). We still like Uchi’s yield story (2019E: 6%) which remains intact given its niche position as a key supplier of coffee modules for Jura. However, we think that near-term growth prospects will be limited by Jura’s growth, which has seen revenue growing at an annual rate in the mid-single digits. Uchi’s overall growth could be more exciting when its new product kicks off (new customer), although the product launch has been delayed for several quarters now. Upside risks: better-than-expected contribution from the new product, which we understand could account for up to 20% of revenue by 2020E, and stronger-than-expected demand for its coffee modules. Downside risk: stronger RM, weaker sales of coffee modules and slower-than-expected rollout of its new product.

Source: Affin Hwang Research - 27 Feb 2019