KUALA LUMPUR: Uchi Technologies Bhd, a Penang-based producer of electronic control modules for coffee machines, is banking on Europeans’ love affair with coffee to improve its profitability.
The group currently derives its earnings entirely from the European market, of which analysts like Affin Hwang Capital Research has expressed concern over Uchi Technologies’ over-reliance on a single market in generating income, noting that demand for high-end automatic coffee machines has slowed in the past few years, in tandem with the sluggish economy in that region.
However, Uchi Technologies executive director Edward Kao Te-Pei is unfazed by the challenges, saying the group has no intention of changing its market focus.
“The nature of our current product line and its application are towards the high-end market, where the main players are from Europe,” he told The Edge Financial Daily in an interview at the group’s headquarters in Penang.
“As a designer, we do not want to end up competing with Chinese players that will compromise our profit margins (due to intense competition). As such, the lower-end market is not the market that we are aiming for.
“Going forward, we will still focus on the high-end consumer appliance market, which mainly originates from Europe,” he said. According to the Sept 19, 2013 findings from global research firm GfK, more than 18 million coffee machines are sold in Europe every year.
Nevertheless, Kao is cognisant that the European market has slowed down since 2002, which prompted many European firms to cut down their advertising and promotion, as well as research and development (R&D) expenditure.
“[However,] in recent meetings, our clients have indicated to us that the economic situation [in Europe] is improving and they may consider increasing their orders again,” he said.
“We don’t know whether this is going to translate into actual orders. We have to wait until June when the ordering process [for the period of June 2016 to June 2017] takes place,” he added.
In view of rising demand, Uchi Technologies said it will be building a bigger R&D team to enhance its capability.
“Currently, we have over 40 R&D personnel. We will increase our headcount at various stages in order not to burden our cash flow,” said Kao.
In a note to clients on Feb 25, Affin Hwang Capital Research said it remains cautiously optimistic about Uchi Technologies in view of sluggish revenue growth.
“So long as the bulk of sales head to the European markets, a region where the economies have remained relatively frail, the replacement cycle for consumer discretionary products such as high-end automatic coffee machines will likely remain lethargic,” the research firm noted.
Affin Hwang Capital Research has upgraded the stock to a “buy” after the recent pullback in its share price, with an unchanged target price (TP) of RM1.90.
For CIMB Research, it sees limited upside to Uchi Technologies’ stock from the current level, given the sluggish industry demand outlook.
“However, the group’s financial position remains strong, with net cash of RM174 million as of December 2015. Hence, we see ample room for the group to increase dividends. The stock offers attractive dividend yields of 7.1% and 7.4% for the financial years ending Dec 31, 2016 and 2017 (FY16 and FY17) respectively,” it said, maintaining a “hold” call with a TP of RM1.71.
To sustain earnings growth, Kao said the group actively participates in international exhibitions every year to exhibit its capability.
Meanwhile, Uchi Technologies expects revenue to remain flat in FY16 due to the volatile economic environment.
“Despite this, we shall endeavour to maintain the average five-year profit margin of 40% this year,” said Kao.
He also said Uchi Technologies is in the process of developing a new electronic control module for coffee machines with a mid-range price tag. In addition, it is developing new products for use in the laboratory and biotech equipment segment, which will create new income streams for the group this year.
Uchi Technologies has two manufacturing plants located in Prai, Penang, and Dongguan, China, with an average utilisation rate of 80%.
“We have allocated about RM5 million in capital expenditure for FY16 and FY17. This includes R&D expenses for coming up with new products,” Kao added.
In the fourth quarter ended Dec 31, 2015 (4QFY15), its net profit surged 71.2% to RM15.84 million, a seven-year high, from RM9.23 million a year ago, mainly underpinned by a strong US dollar rather than volume expansion. Revenue grew 24.4% to RM30.4 million from RM24.43 million in 4QFY14.
For the full year (FY15), it posted a 23% jump in net profit to RM49.3 million from RM40.11 million, while revenue was at RM112.61 million, an 18% increase from FY14’s RM95.43 million.
Year to date, Uchi Technologies’ share price has fallen by seven sen or 4% from RM1.74 on Dec 31, 2015. The stock closed unchanged at RM1.67 last Friday, bringing a market capitalisation of RM660.47 million.
UCHITEC (7100) - Uchi Technologies riding on Europeans’ love for coffee
http://www.theedgemarkets.com/my/article/uchi-technologies-riding-europeans%E2%80%99-love-coffee
