Uchi’s 1Q20 results were relatively decent amidst the plant closure due to the movement control order. Yet, with the full brunt of the impact expected in 2Q20, we think that subsequent quarters would be weaker. A demand recovery in 2H20 remains at risk, especially amidst a challenging global macro environment. We see little justification for its PE valuations at above the 5-year mean, especially as we do not foresee earnings returning to the FY19 peak over the next 3 years. Downgrade to Sell despite higher TP of RM2.15.

1Q20 Core Earnings Jumped 12% Yoy, Within Expectations

Uchi‘s 1Q20 revenue was rather flat but core earnings jumped 12% yoy largely due to margin improvement (EBITDA margin jumped 4ppts yoy). Notably, revenue has declined for two consecutive quarters and this is likely to persist. Management has guided for a low double-digit decline in US$ revenue in 2020, down from US$38m in 2019. We have projected a 2020E US$ revenue of US$31m.

Earnings Not Likely to Return to Peak FY19 Levels Over Next 3 Years

The sharp appreciation in the stock price in the past 2 months is pricing in a sharp recovery in earnings which we believe is highly unlikely. With Covid-19 and the lockdown, we expect production to be impacted in 2Q20, which would likely result in weaker earnings sequentially. A demand recovery in 2H20 remains questionable, especially for discretionary items, amidst a global economic slowdown. We do not expect earnings to recover and exceed the peak in FY19 over at least the next 3 years.

Downgrade to SELL Despite Higher Target Price of RM2.15

While we like Uchi’s management and niche business model, we think that its PE valuations, currently above the 5-year mean of 15x, do not seem justifiable given the weak macro outlook. Hence, we downgrade the stock to Sell from Hold, despite raising the 12-month target price to RM2.15 as we roll forward our valuation horizon to 2021 with an unchanged target PE of 15x. While Uchi is prized for its dividend yields, at current levels of c.5%, we find that better yields can be found elsewhere. Upside risks: Weaker RM, stronger sales of coffee modules and stronger-than-expected rollout of its new product.

Source: Affin Hwang Research - 22 May 2020