Uchi’s 6M19 core profit of RM34m (+17% yoy) was in line with expectations. Uchi reported one of its strongest quarterly revenues since 2Q08 while, importantly, margins have remained sturdy. Maintain BUY with an unchanged TP of RM3.09 (based on 17x 2020E EPS). Uchi is our preferred sector pick for its stable and attractive dividend yield, which will likely be favoured especially amidst current market volatility as the trade tensions escalate.

6M19 Core Earnings Jumped 17% Yoy, Within Expectations

Uchi’s 6M19 core profit of RM34m (+17% yoy) was within expectations, accounting for 44% and 46% of our and the street’s full year forecasts. We believe that its key customer, Jura, continues to perform well, and is likely to penetrate into new markets and new product segments, and thus driving the growth of Uchi’s coffee modules for such automated coffee machines. Uchi reported its strongest quarterly revenue in US$ terms since 2Q08. While the weaker RM has aided revenue expansion, sales in US$ terms has also risen, contributing to the better performance for 6M19. 6M19 EBITDA margin improved by 2.1ppts yoy to 50.6%, likely to have been better due to the favourable exchange rate, a higher rate of new product introduction and possibly a slight shift in product mix towards the higher-margin biotech laboratory equipment.

2Q19 Core Earnings Higher by 7% Qoq

Earnings momentum remained positive on a sequential basis although we are not overly concerned about its fluctuating quarterly EBITDA margins which have ranged between 46.1-57.9% over the past 3 years.

Maintain BUY and Target Price of RM3.09

Maintain Buy and target price of RM3.09 based on an unchanged target PE of 17x on 2020E EPS. Uchi remains our preferred sector pick. With dividend yields of 6% , Uchi remains a compelling yield play as we expect demand for automatic coffee machines to remain relatively sturdy supported by its customer Jura’s continuous expansion into new markets. Further, there could be potential earnings growth upside, should development of its new products and customers materialize. Downside risks: stronger RM, weaker sales of coffee modules and slower than expected rollout of its new products.

Source: Affin Hwang Research - 27 Aug 2019