• 3Q20 Revenue and Earnings Recover Sharply Post Movement Control Order
• 9M20 core profit was above expectations, accounting for 84% of our fullyear forecast due to better-than-expected margins
• Revenue outlook has also improved as management guides for a narrower decline. Raising EPS and target price and upgrading Uchi to BUY. Yields at ~5-6% are attractive

Revenue and Earnings Recovered in 3Q20

3Q20 revenue and core profit surged by 57% and 96% qoq respectively, but largely due to the low base in 2Q20, which was impacted by the Movement Control Order (MCO) which disrupted Uchi’s operations during the quarter. In tandem with the higher revenue and hence better operating leverage, 3Q20 EBITDA margin jumped 10ppts qoq to a high of 63.4%. While this may have also been due to better revenue mix, we think that there may have been lower production costs due to one-off cost savings implemented during the MCO which may not be repeated in the subsequent quarters.

9M20 results above expectations, projecting smaller 2020 revenue decline

Cumulatively, Uchi’s 9M20 core profit of RM55m (-2% yoy) came in above expectations, accounting for 84%-85% of our and street’s full-year estimates respectively. The earnings surprise was largely due to the better-than-expected EBITDA margin. Overall, while 9M20 revenue fell a sharp 13% yoy, this was made up by the 5ppt yoy jump in EBITDA margin. Management also revised its 2020 revenue outlook guidance, expecting a single-digit decline in US$ terms, compared to its earlier estimate of a low double-digit decline.

Upgrade to BUY With a Higher 12-month TP of RM2.92

We leave our revenue forecasts unchanged but raise our margin assumption to reflect the better-than-expected margins. Our CY20-22E EPS are raised by 8.3-8.5%. In tandem, we raise our target price to RM2.92 (from RM2.75) based on a PE of 18x or +1SD its 5-year historical mean, on 2021E EPS. Given the 12% upside, we upgrade the stock to a BUY. We like Uchi for its strong relationship with its key customer and how it remains the sole supplier of its coffee modules. Its niche strategy and well regarded management team has helped sustain the company’s solid financial track record and likewise its strong dividend payout ratio. Its dividend yields of 5-6% also looks attractive. Key risks include weaker demand, weaker RM against the US$ and gain/loss of customers.

Source: Affin Hwang Research - 26 Nov 2020