• 2Q20 revenue and earnings fell sharply due to the MCO, but EBITDA margin remained solid as costs were well contained
• Although accounting for 50% of our full-year estimate, the results are above our expectations on management’s guidance of a stronger 2H20
• 2020-22E EPS are raised by 7% to reflect the improved outlook, but this looks to be in the price. Stock is trading at +1SD its 5-year mean PE while dividend yields at 5% are near its 3-year mean. Maintain Hold

Sharp Decline in Revenue/profits in 2Q20

Due to the Movement Control Order (MCO) which disrupted Uchi’s operation during the quarter, Uchi‘s 2Q20 revenue fell a sharp 28% qoq and 34% yoy. However, despite the revenue decline, management managed to contain costs leading to only a slight 2.6ppt qoq decline in the EBITDA margin. As a result, the 2Q20 core profit of RM12.5m was a pleasant surprise.

6M20 Results Surprised Positively

Uchi’s 6M20 core profit of RM31m (-10% yoy), while accounting for 50% and 49% of our and the consensus full-year 2020 estimates, was above expectations. This is largely due to management’s revised revenue guidance for 2H20 to be stronger (relative to 1H20) based on the current pipeline of customer orders. Also, in its prospects commentary, management guided that 2020 revenue in US$ terms will decline by a low double digit yoy, in sharp contrast to our earlier forecast for a contraction of 18% yoy.

Maintain HOLD With 12-month TP of RM2.75

We raise our 2020-22 EPS forecasts by 7.1%/7.0%/7.2% respectively to account for the better 2H20 that management is expecting and taking into account the relatively more stable demand for its products going into 2021-22. Concurrently, our TP is raised to RM2.75 based on an unchanged PE target of 18x or +1SD on the 2021E EPS. We maintain our Hold rating in view of the limited upside potential. Valuations look fair in view of the current ample market liquidity and its above-average dividend yields. Key risks include better/weaker demand, firmer/weaker RM against the US$ and new/loss of customers.

Source: Affin Hwang Research - 27 Aug 2020