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Thursday, August 24, 2017

Affin Hwang raises Uchi to buy on strong earnings growth

Thursday, 24 August 2017 | MYT 8:57 AM

KUALA LUMPUR: Affin Hwang Capital Research says Uchi Technologies Bhd's first half of FY2017 results were above its expectations with revenue up 11% owing to stronger sales.

Core net profit was 56% of its previous 2017 forecast and 54% of the street's on the back of the stronger revenue, which was bumped up by stronger demand for Uchi's coffee modules and biotech laboratory equipment.

"On a sequential basis, while 2Q17 revenue was weaker due to both the lower sales volumes and adverse currency impact, the 9ppt improvement in the EBITDA margin lifted core earnings by 17% quarter-on-quarter.

"We think that the sharp margin improvement is not sustainable; the EBITDA margin has traditionally been volatile because of changes in the product mix as well as R&D expenditure that is expensed. We think a longer-term EBITDA margin at the 50% level would be sustainable given Uchi’s niche product manufacturing strategy," it said.

Uchi's management has guided for mid to high single-digit revenue growth in US$ terms for 2017 on the back of positive and encouraging incoming orders. Affin Hwang Research believes this could be owing to customer Jura, which gaining market share and aiming for futher growth.

The research house has raised its 2017-19E earnings per share by 14% to 30%. With the stronger earnings growth and more attractive dividend yields of 7% to 8% in 2017-19E, it values the stock with a PE of 16x on CY18E EPS, which is at a 10% discount to the target PE for the FMBKLCI.

THe stock has been upgraded to "buy" with target price raised to RM2.67 from RM1.81.

Affin Hwang Research cautions risks including a slowdown in global demand for automated high-end coffee machines, new competition and a loss of customer base.


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