Uchi reported another solid quarter in 4Q19. Although slightly lower qoq, the robust 4Q19 profit was near the record level reported in 3Q19 driven by both revenue and margin gains. This was on the back of strong demand for a customer’s coffee machines; we understand the customer, Jura, continues to penetrate new segments and builds market share. We remain optimistic on Uchi’s prospects given Jura’s strong branding and Uchi’s cost proposition. Maintain BUY but with a lower TP of RM2.96 as we price in near-term headwinds from Covid-19.

2019 Core Earnings Jumped 16% Yoy, Within Expectations

Uchi ended 4Q19 strongly with a robust profit (+15% yoy) on the back of strong demand for a customer’s coffee machines as it penetrates new markets and grows market share in the fully automated segment. The stronger quarterly performance pushed the 2019 core profit to RM77m (+16% yoy), which was within expectations. Apart from revenue growth, Uchi saw margin expansion (2019 EBITDA margin grew 2.7ppts yoy) as a result of a favourable product mix.

EPS Forecast Revisions to Reflect Covid-19

Although results were in line with expectations, we revise downwards our 2020-21E EPS by 4% to reflect the negative impact from supply chain disruptions and also weaker demand arising from the Covid-19 epidemic. Nevertheless, there could be upside risk to earnings should some of the products that are in the works with a potential new customer become fully commercialised. We introduce our 2022E EPS of 19.7 sen (+6% yoy).

Maintain BUY With Lower Target Price of RM2.96

Beyond the near term, we remain optimistic on the prospects of Uchi’s current key customer, Jura, which has a strong product range that has also helped it expand beyond its home market in Europe. With revenue share of c.20% in the global market, we think that there are still growth opportunities for Jura and likewise for Uchi. With a fairly stable business environment, Uchi’s fairly attractive dividend yields should remain intact. We maintain our BUY call but with a lower 12-month TP of RM2.96 based on an unchanged target PE of 17x on the 2020E EPS. Downside risks: stronger RM, weaker sales of coffee modules and slower-than-expected rollout of new products.

Source: Affin Hwang Research - 27 Feb 2020