Uchi Technologies Bhd
(March 31, RM1.92)
Maintain neutral with a lower target price of RM1.97: Our earnings growth assumptions for Uchi Technologies Bhd are tweaked downwards following the company’s revenue warning. Risks to our call are a steeper drop in customer orders, Covid-19 uncertainties and a longer-than-expected production halt.

Uchi released a revenue warning announcement last week, expecting low double-digit declines in revenue in US dollar for the financial year ending Dec 31, 2020 (FY20), attributed to lower demand. Its main customers centred around Europe are experiencing lockdowns akin to the movement control order (MCO) in Malaysia with only essential goods allowed to be produced and flow freely.

The lockdowns are expected to further tighten as the region’s death toll and confirmed cases continue to rise, further weighing down the economy and also Uchi’s sales.

Having ceased production temporarily, Uchi is awaiting approval from the international trade and industry ministry to resume operations. Before to the MCO, its capacity utilisation was around 80% to 85%.

Uchi will maintain a 70% payout of net profits. Based on our forecasts, we expect a 10 sen per share dividend payout, an approximate yield of 5.4%.

Given the uncertain economic outlook, it is expected that Uchi will remain prudent in spending and investments. Its current budgeted capital expenditure is earmarked at RM5 million per year.

Our earnings forecasts for Uchi are lowered 8% and 7.6% for FY20 and FY21 respectively, in view of the production disruptions, but we assume a modest recovery moving into FY21.

We previously noted weakening demand in Europe based on the European Union (EU) Domestic Demand Index, otherwise known as real gross domestic product by expenditure for the EU, which we believe is a credible indicator of Uchi’s performance as a substantial portion of its revenue is derived in Europe.

We may continue to see a slower earnings growth for Uchi in the short term, at least until we see some alleviation in the Covid-19 outbreak. — Inter-Pacific Research, March 31