DATE : 08 February 2021
UCHI TECHNOLOGIES BERHAD (UCHITEC)
Current Price : RM3.01
UCHITECH – Confirm Breakout. Support level on RM2.95. Volumes is still there and the chart pattern is Bullish.
My Target Price (Mother & Warrant):-
TP1 : RM3.25 / UCHITEC-CI : 0.18 senTP2 : RM3.45 / UCHITEC-CI : 0.25 sen
(Time-Frame – Till End of this month)
The Key :-
1. Good fundamental stock2. Cash Rich & Zero Debt company3. Incoming Good Q4 report (End Of February)4. Involved with storage vaccines (Deep freezer) in Europe.
WHAT KIM SAY?
“UCHI develops and manufactures products for laboratory and industrial instrument applications such as precision weighing scales, deep freezers, centrifuges, and pipettes. Their clients include Sartorius Group, based in Germany (FY2019 Revenue was €1,827m), and Eppendorf, a leading life science German company.“
WHY I PICKED THEM AS MY NEW GEMS?
“They are involved freezers for UK COVID-19 vaccines”. Do you believe it? Their SALES are BOOM!!!- Kim
On news 14th December 2020 – SLS and Eppendorf to supply ultra-low temperature freezers for UK COVID-19 vaccines | SelectScience
SLS and Eppendorf to supply ultra-low temperature freezers for UK COVID-19 vaccinesScientific Laboratory Supplies (SLS) and one of the leading international life sciences companies, Eppendorf, have been chosen to provide ultra-low temperature (ULT) freezers for the country’s supply of COVID-19 vaccines.
SLS – one of the UK’s largest independent suppliers of chemicals, laboratory equipment and consumables – was awarded a contract by the Department of Health and Social Care (DHSC) to equip two central storage sites and 54 regional hubs with the vital laboratory equipment required for safe and secure storage of the newly developed vaccine.
SLS has over 25 years of experience supporting the UK life sciences and healthcare sectors with a wide range of laboratory equipment, and has worked closely with Eppendorf, the DHSC and the NHS to ensure that these freezers would be ready as soon as a vaccine became available. The SLS team provided information and advice, identifying Eppendorf’s UK-manufactured ULT freezers as the best suited to the vaccination programme’s needs. The contract will provide 380 of the 101 litre under-bench units, and 60 of the 570 litre mass storage units, vastly increasing the sites’ current capacity to safely store the vaccine. The company is also coordinating the delivery, installation and testing of the units, as well as supplying the personal protective equipment necessary for each site, allowing the entire rollout to be completed in a matter of weeks.
Bob Mclaughlin, Sales Director at SLS, explained: “This is an extremely ambitious and challenging project as, until recently, we didn’t know when a vaccine might be approved, or what its storage requirements might be. Open communication and adaptability have been essential, and we have worked side-by-side with Eppendorf to develop a strategy that would allow us to deliver and validate these large, heavy ULT freezers to almost 60 sites at very short notice. We are very proud of what we have achieved, providing everything on time and on budget to help in the UK’s fight against SARS-CoV-2.”
Steve Dey, Head of European Segment Marketing at Eppendorf UK, added: “Eppendorf is very proud that products we have long provided to the global life science community will assist with efforts to beat SARS-CoV-2. Working closely with our long-term partner SLS and our UK manufacturing site, we are extremely pleased that our ultra-low temperature freezers will be in the front line, supporting the NHS and the British public.”
ANOTHER KIM REASON WHY HE CHOOSED UCHI :-
The main product of Uchitec is electronic control system. By its application, it can be categorized into
1. For household art-of-living products, mainly fully-automated coffee machines
Uchi used to be dependent on several coffee manufacturers, which includes the likes of Nespresso, Krups, Saeco, Bosch and Jura, for business revenue. This business model changed when Uchi signed an exclusive agreement with Swiss-based coffee machine manufacturer, Jura last 3 years. This agreement eventually led to Uchi being the sole source for Jura’s coffee machine modules, which aided the latter with technological improvement and upgrades and thus provided Jura with an edge over competitors. While Uchi still manufacturers some coffee modules for the other brands, but once these are removed from the shelves, they will not be replaced and therefore will not be used in future models.
2. For biotechnology laboratory or industrial instruments, such as weighing scales, centrifuges and deep freezers.
Among the two categories above, art-of-living products is the product category that contributes the most, at 81% of revenue as of financial year 2019. Biotechnology products contributed 18% of revenue in the same financial year.
Uchitec holds three 100%-owned subsidiaries, two in Malaysia and one in China. Its subsidiary Uchi Optoelectronic (M) in Malaysia, or called “UOM”, is the main operating unit performing R&D activities and manufacturing of electronic control modules, while the other two subsidiaries are assembly arms of UOM. It is also worth to take note, according to responses from management during annual general meeting (AGM) 2020, due to trade war between US and China, company is adjusting production volume in China factory and in Penang factory.
– Growing the biotech segmentThe biotech segment accounts for the remaining 21% of Uchi’s revenue. Uchi serves 2 major customers here, namely Sartorius and Eppendorf, which are both international pharmaceutical and laboratory equipment suppliers, manufacturing electronic modules for use in precision weighing scales, electronic pipettes and deep freezers.
– Optimistic on future growthWhile the ambition had been to grow this division, which would be positive as it carries higher margins, the revenue split has been pretty stable over the years. I am nevertheless optimistic that revenue will eventually grow as trust and relationships are built leading to a higher number of new products outsourced (the deep freezer for Eppendorf was one of the more recent products). Moreover, the higher manufacturing cost in Europe, Malaysia could be another reason for product transfer, as we believe that Uchi offers better cost-efficient solutions. Also SLS and Eppendorf to supply ultra-low temperature freezers for UK COVID-19 vaccines!!!!
3. ODM business
Uchitec is original design manufacturer (ODM) of electronic control system. Their products are not finished products, but partial products that need to be further assembled and completed by customers.
More than 90% of their products are exported to Europe. More precisely, exported to Switzerland, Portugal and Germany. The breakdown percentage of revenue contribution from these three countries has not been changed much, at least since 2017 when this information started to disclose in annual report. In case you wonder who is biggest customer of Uchitec, it is Swiss coffee maker Jura.
4. High profit margin
Uchitec is known for its capability in maintaining a very high operating profit margin. From disclosure in annual reports. operating profit margin has been at a level of above 40% since 2000. Note that this operating margin is calculated after taking account of raw material cost, employee expense, depreciation and R&D expense, so it is indeed very impressive.
5. Net cash company
Uchitec has zero borrowing, and RM117 million of cash as of September 2020. This is equivalent to 26 sen of net cash per share.
Back in 2017, Uchitec had even more cash, standing at RM243 million. In 2018, management thought it was not necessary to hold so much of cash, therefore about RM90 million was paid back to shareholders as capital repayment 6. Financial highlights
- Because of COVID-19 pandemic, Uchitec did not perform well for first half of 2020. Coming to Q3, it can be clearly seen that business has started to recover, especially in the area of household art-of-living products / coffee machine. For biotechnology laboratory or industrial instrument products, revenue is less than 1/3 of same period last year. But this is not the main earning driver of company, so its impact is less significant.
- In the latest quarter, compared to the same period last year, despite 6% drop in revenue, net profit after tax is 3% better. Looking into details in quarterly report, besides favorable forex, another reason is less income tax expense. As mentioned earlier, certain products of company is tax exempted. In 2020, either looking at Q3 alone or over 9 months period, income tax expense is even less compared to previous year. This is certainly good, but I cannot find disclosure about reason behind in quarterly report. Maybe there will be more clarify in next annual report.
- For period of 9 months ending September 2020, revenue is down by 13% and operating profit declined by 8%, compared to previous financial year.
- With regards to prospect of current financial year 2020, management conveyed the following message to shareholders in the latest quarterly report. Initially at Q1, management expected high double digit drop of revenue in USD, this was amended to low double digit in Q2. In the latest Q3, this again was amended to only single digit. So it can be felt that the overall business has been recovering and improving.
Barring any unforeseeable impacts that my be caused by COVID-19 pandemic and/or by the US-China conflict, the Group expects a low single digit revenue decline in USD for the current financial year in comparison to that of the financial year ended December 31, 2019. This is based on their customers’ current incoming orders, which have been stronger in the second half of the year.
7. Improved outlook has helped PE multiple re-rating
Uchi’s stock price has re-rated after the recent 3Q20 results announcement,driven by management’s guidance of an improved outlook over the nearterm. This is a marked contrast to its outlook and guidance over the past fewyears, which have been sombre and mostly expecting sales to be flat.
8. Earnings upside risk is real
I think that positive earnings risks are likely considering Jura’s confidencein growing its business in new geographical markets while gainingmomentum in the office and professional segment (which could help inmargin expansion). Meanwhile, I also believe that there is scope for Uchito secure new products/customers, as management has continually beenparticipating in trade shows and showcasing its abilities and offering costcompetitive solutions.
9. Potential capital management initiatives
In my view, there are potential capital management initiatives. Uchi’s cashand equivalents have been growing while it hasminimal near-term capex requirements, and it could also exhaust its sharepremium that could easily translate to a 1 for 2 bonus issue.
10. Maintain BUY with higher target price of RM3.45
With the improved last earnings growth prospects and potential capitalmanagement initiatives, I believe Uchi’s PE multiple could continue tore-rate over the near term. Moreover, the company is well managed andprudently run, as reflected in its expanding cash position and zero debt.
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