AMID the rally in technology stocks that has pushed valuations through the roof, one particular company has remained a relatively cheaper proxy to the sector despite its attractive dividend yield and strong profit margin.
In comparison to the industry’s “big boys” such as Vitrox Corp Bhd, Pentamaster Corp Bhd and Greatech Technology Bhd that have price-to-earnings (PE) ratios in the range of 60-80 times, Penang-based Uchi Technologies Bhd has a PE of just 19 times.
The company, which designs and develops electronic control systems, has seen its share price rising by nearly 77% from the lows of 2020. However, the current share price of RM3 remains slightly lower than the levels seen in 2017-2018.
Based on its website, Uchi says it serves a wide base of multinational companies, located primarily in Europe. The region contributes over 90% of Uchi’s annual turnover.
However, unknown to many, Uchi (pic above) has been supplying components to one of the world’s leading ultra-low temperature (ULT) freezer makers, the Germany-based Eppendorf AG.
In December 2020, it was reported that Eppendorf and Scientific Laboratory Supplies have been chosen to supply ULT freezers for the storage of Covid-19 vaccines in the United Kingdom.
It is noteworthy that the Pfizer-BioNTech’s Covid-19 vaccine needs special freezers that could store the doses in ultra-cold temperatures of -70°C.
Countries have been rushing to purchase ultra-cold storage facilities, which are necessary to maintain the potency of the vaccine and ensure its effectiveness.
In the case of Malaysia, the Science, Technology and Innovation Minister Khairy Jamaluddin said in January that the government would spend RM6.7mil to purchase deep freezers to store the Pfizer-BioNTech vaccine, which will be arriving on Feb 26.
A source close to Uchi tells StarBizWeek that Eppendorf has been a long-term client of the company.
“Under its biotechnology segment, Uchi has been making deep freezer components for Eppendorf.
“In the last six months or more, the demand for such freezers had risen sharply as many companies and governments were preparing to roll out the vaccination programmes. The demand may likely rise further in 2021 as countries turn more aggressive in vaccinating their population. To an extent, Uchi will benefit from this demand, ” the source says.
A quick check on its 2019 annual report showed that the biotechnology segment contributed 18% of Uchi’s revenue.
“Products in this category include electronic control systems such as high precision weighing scales, centrifuges and deep freezers, ” according to Uchi.
Meanwhile, the biggest revenue contributor of 81% is the “Art-of-living” product group.
This product category comprises electronic control systems for household appliances as well as professional appliances for the office and office services sector.
It is unclear whether Uchi has seen a significant jump in orders for deep freezer components, as the company does not provide a breakdown.
Uchi’s performance in the first nine months of financial year 2020 (9M20) has been adversely affected by the challenges arising from the Covid-19 outbreak globally.
The company had issued a profit warning in its first quarter results filing, anticipating a low double-digit revenue decline in US dollar-denominated receipts for the year due to lower sales.
However, as orders turned stronger in the second half of the year, Uchi amended its expectations to “a low single-digit revenue decline in US dollars” in its third quarter results’ filing on Nov 25,2020.
“Nevertheless, the group is confident that we will remain profitable and maintain a strong balance sheet, ” it said.
Affin Hwang Capital analyst Kevin Low said in a Nov 26,2020 report that Uchi’s core profit in 9M20 was above expectations, accounting for 84% of his full-year forecast due to better-than-expected margins.
In tandem with the higher revenue and hence better operating leverage, he pointed out that Uchi’s earnings before interest, taxes, depreciation and amortisation (Ebitda) margin in the third quarter of financial year 2020 (3Q20) jumped by 10 percentage points quarter-on-quarter to a high of 63.4%.
“While this may have also been due to a better revenue mix, we think that there may have been lower production costs due to one-off cost savings implemented during the movement control order which may not be repeated in the subsequent quarters, ” he said.
For comparison, the Ebitda margin recorded in the pre-pandemic 3Q19 was 57.1%.
In fact, Uchi has recorded a consistent operating profit margin averaging 45% since its listing in 2000.
Low also added that the company’s revenue outlook has improved, as the management has revised its 2020 revenue guidance with a narrower decline.
Low left his revenue forecasts for Uchi unchanged, but raised the earnings per share estimates for 2020-2022 by 8.3% to 8.5%.
Affin Hwang Capital currently has a “buy” call on the stock, which it upgraded in November last year.
“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, ” according to Low.
Since 2013, Uchi has maintained a dividend policy of allocating at least 70% of its profit after taxation.
Uchi also has a sturdy balance sheet with zero debt against a cash and cash equivalents of RM117.39mil.
Such a financial position would provide ample room for Uchi to expand its operations, both organically and inorganically.
Currently, Uchi has two operating plants, one in Malaysia and another in Guangdong, China.