Tuesday, July 19, 2011
Uchi Tech: A story of two halves
Uchi Technologies Bhd
(July 18, RM1.31)
Maintain add at RM1.33 with target price of RM1.55: We recently met up with the management for an update on company operations and financial performance for FY11. We gather that the company will report a fairly robust 1HFY11 performance in line with our expectations of firmer demand for its automated coffee machine modules. However, similar to other major exporters, Uchi is unlikely to be left unscathed by the weaker US dollar. Impact from the strong ringgit should however be mitigated by the hedging of its sales proceeds. The management guided that 80% of its sales proceeds are locked in at rates above current spot rates and also above those used for its costing computation. This would allow Uchi to keep its margins healthy. We project a slightly firmer earnings before interest, tax, depreciation and amortisation (Ebitda) margin of 49% for FY11 compared with 48.5% for FY10.
Unfortunately, management is bracing for a weaker 2HFY11 impacted by weaker consumer sentiment in Europe, which is also a key market for its end products. Also clouding prospects is a delay in the launch of two new products as a result of a disruption in the supply of microprocessors from its supplier, Renesas, which saw its Fukuoka plant hit by the tsunami in March. The management believes that supply of its raw materials will only normalise beyond October, although this means that it would miss the critical Christmas holiday sales season.
Looking ahead, the management continues to seek to diversify its earnings base away from coffee modules (currently 80% of revenue) and is making headway into iron control modules (for a Spanish customer), frequency converter (Eppendorf) and also several component products. This is still at the preliminary stage of development, hence initial sales contribution is unlikely to be significant. Longer term, the management is investing in a R&D centre, involving an extension of its existing plant in Prai. At an estimated cost of RM30 million-35 million, the facility would be funded internally (net cash of RM140 million) and will not impact its dividends. To better cater for its customers and for product development, the new centre will include prototype laboratories, reliability test rooms and clean rooms for high-end products. We think this would continue to ensure that Uchi maintains its lead in the high-end niche market segment it operates in.
Despite some minor hiccups, we remain positive on the longer-term prospects of the company given its solid positioning as a key supplier of high-end automated coffee modules. With strong free cash flow and limited capital expenditure, Uchi has managed to reward investors with superior dividend yield of over 8%. Maintain our “add” rating on Uchi with an unchanged target price of RM1.55. — Affin IB Research, July 18
This article appeared in The Edge Financial Daily, July 19, 2011.