Uchi’s 1Q19 results were seasonally weaker but in line with expectations. We do not expect significant deviations in the coming quarters. Stability has been a crucial component of Uchi’s earnings in the past and this has ensured a steady dividend payout. At a 2019E yield of 6%, we think this is attractive as there could be upside potential from the expansion of a new product as well as the current weak RM. Upgrade to BUY with a higher TP of RM3.09 (based on an unchanged target PE multiple of 17x but after rolling forward to 2020E EPS).

1Q19 Core Net Profit Jumped 19% Yoy, Within Expectation

Uchi’s 1Q19 core profit of RM16.5m (+18,6% yoy) was within expectations, accounting for 21% and 22% of our and the street’s full-year forecasts. The better earnings were driven by a combination of stronger sales (+9% yoy in US$ terms) as well as currency impact from a stronger US$. EBITDA margin improved by 4.8ppts yoy to 51.4%, likely due to the above reasons, although notably margins have remained fairly stable over a longer-term period, in the range of 46-58%, with a lot of the margin volatility driven by sales volume, currency and product mix during the quarter. For the latter, coffee machine panels continued to account for the bulk of Uchi’s revenue and earnings.

1Q19 Core Net Profit 9% Lower Qoq

While earnings contracted 9% qoq, we are not too concerned over the seasonal slowdown. Importantly, margins remain intact while revenues and earnings were relatively stable.

Upgrading to BUY, Target Price Raised to RM3.09

Although earnings excitement for the stock is limited, its partnership with its key customer, Jura, has resulted in continued stability in terms of profitability and, in turn, dividends. At a forecast DPS of 17 sen for 2019E, dividend yield at 6% looks attractive. There could be upside to this should the RM remains weak vis-à-vis the US$ and potentially from the commencement of a new product. Upgrade to BUY as we favour high dividend yield growers that could remain in the spotlight with escalating market volatility. Target price is raised to RM3.09 (from RM3.02) as we roll forward our valuation horizon to 2020E (from 2019E) but based on an unchanged target PE of 17x. Downside risks: stronger RM, weaker sales of coffee modules and slower-than-expected rollout of its new product.

Source: Affin Hwang Research - 28 May 2019