UCHI TECHNOLOGIES BERHAD - Steady Dividend Play

Author: PublicInvest   |   Publish date: Tue, 17 Sep 09:25 

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We visited Uchi Technologies (Uchitech) new plant/office facilities in Prai and were impressed with the green features of the new building such as indoor garden and natural ventilation & lighting. Management indicated that Uchitech‟s biotech segment will drive the group‟s future growth. While we like Uchitech for its high dividend yield of 8.6%, we remain concerned on the relatively flat growth in its revenue over the past three years. We derive our fair value of RM1.34 for Uchitech based on PER valuation.

Company background. Uchitech was incorporated in 1998 and listed on the Second Board of Bursa Malaysia in 2000. Subsequently, it transferred to the Main Board of Bursa Malaysia in 2002. Besides its main manufacturing and R&D facilities in Prai, the group also owns and operates a manufacturing plant in Dongguan, China. Uchitech is principally involved in original design manufacturing (ODM) which it develops the software programming, hardware design and system construction of its ODM products. The group designs and develops electronic control modules in-house for its customers to use in their finished products (e.g. coffee machines and precision weighing scale). Its key product, electronic control module for coffee machine, is used in various brands of coffee machines such as Krups, Jura and Nespresso.
Investment merits.
(i) Solid track record of paying out generous dividends of 12 sen p.a. for FY10-12 or current dividend yield of 8.6%. The group has a dividend policy of paying out at least 70% of its net profit after tax. In the past two years, Uchitech has paid out more than 90% of its net profit;
(ii) As an ODM player, it controls the intellectual property rights of key technologies and can mitigate a „squeeze on its operating margin relatively better than an OEM. In the past three years, the group‟s pre-tax profit margin has been relatively stable in the 50% region;
(iii) A recovery in the Euro-zone region will benefit Uchitech as it will improve the demand for coffee machines which uses Uchitec‟s electronic control module. A significant portion of Uchitech‟s sales is to Eugster/Frismag which is a key European OEM producer for various prominent brands of coffee machines such as Krups, Jura, AEG and Nespreso;
(iv) Uchitech‟s previous manufacturing building in Prai (next to its new building) is currently vacant. It will likely be rented out and would provide another source of income to the group. In the event the group gets a good offer for the old factory, it may even consider to dispose it for a one-off gain; and
(v) The group is looking into growing its bio-tech segment such as highprecision weighing scales and centrifuges. 
Its bio-tech segment currently accounted for 24% of revenue and is expected to increase its contribution in the future. Generally, its bio-tech segment generates higher margin but the life-spans of bio-tech products are also longer.

Investment risks. Key investment risks include: (i) significant reliance on Eugster and Euro-zone for its electronic control modules; (ii) volatility in USD/MYR may result in forex gains/losses as its sales are mainly in USD; and (iii) if its strategic goal to grow the bio-tech segment did not materialise as planned, it would likely impact the group‟s future growth.

Financials. For 1H13, Uchitech‟s revenue grew 24.2% y-o-y to RM49.7m but its net profit declined 11.2% y-o-y to RM17.0m. Its lower net profit was mainly due to higher effective tax rate from FY13 due to the expiry of its pioneer status on 31 December 2012. Its 1H13 operating profit and pre-tax profit were 26.2% and 20.1% higher y-o-y respectively.

The group has submitted the application of pioneer status for its new products in September 2012 but have yet to receive a reply from the relevant authorities. Any positive response from the tax authorities will result in reversal of the tax expenses provided in 1H13 and significantly improve its reported net profit for FY13.

Management expects the group‟s revenue in USD terms to remain flat for FY13. In light of USD appreciation against RM in recent months, Uchitech‟s revenue in FY13 should improve. As at end-1H13, Uchitech‟s balance sheet remained healthy with net cash position of RM134.1m or 36sen/share.

Valuation – fair value of RM1.34. 
We derive our fair value of RM1.34 for Uchitech using PER valuation by ascribing a P/E multiple of 13x to its FY14 EPS. The P/E multiple ascribed was based on a blended multiple of Uchitech‟s 5-year average traded P/Es and its comparable ODM peers in the Asean region. We note Uchitech‟s fair value will be higher in the event that it receives pioneer status for its new products which will significantly reduce the group‟s effective tax rate.