Since our initial coverage of UCHI back in January 2021, UCHI’s share price has increased steadily to a 52-week high of RM3.10.
In this article, we digest and provide an update on UCHI’s latest quarterly results.
UPDATE ON LATEST QUARTER (OCT – DEC) RESULTS
Compared to the previous quarter, the Group’s revenue increased strongly by 32%, while its net profit increased by RM8.6m or 36%.
The stronger performance is mainly due to the increase in demand for the Group’s products and services, which we believe were partly backlogs brought forward from the earlier quarters.
Profitability increased closely in tandem with the rise in revenue. The healthier margins is principally due to better economies of scale achieved from higher revenue/production.
UPDATE ON FY2020 (JAN – DEC) RESULTS
Despite the decrease in revenue, the Group recorded a 8.5% increase in operating profit for the year ended 31 December 2020, from RM75.8 million to RM83.5 million.
The improvement is attributed to:
- Decrease in average fixed and variable costs, and
- Increase in net fair value gain on derivative financial instruments of RM2.0 million (net fair value gain on derivative financial instruments was RM0.6 million in 2019)
Overall, we view the Group favorably for being able to sustain its 2019 revenue while showing a strong profit, despite the pandemic.
CORPORATE UPDATES
There were no major news / developments on the Group since our initial coverage.
VALUATION UPDATES
With reference to UCHI’s latest quarter results and a brief guidance provided by the Management on its FY2021 performance, we have made slight adjustments to our projection on UCHI’s FY2021 full year results, as below.
Assumptions:
| Previous | Revised | Reasons |
|---|---|---|
| Revenue growth rate assumed between 5% – 10% | Revenue growth rate assumed to remain between 5% – 10%. However, base case growth rate was revised downwards from 10% to 5%. | Management guided in the latest announcement that they are expecting low single digit growth for FY2021. |
| GP Margin assumed between 67.5% – 68.5% | GP Margin assumed to improve to a range of 69% – 73%. | Better clarity from the latest quarter result. |
| Operating margin assumed between 46.2% – 47.0% | Operating margin assumed to improve to a range of 50.6% – 53.7% | Better clarity from the latest quarter result. Better economies of scale. |
| Income from deposits and investments assumed around RM5mil p.a. | Assumed income from deposits and investments revised to around RM4.8mil p.a. | Better clarity from the latest quarter result, and taking into consideration the low interest rate environment. |
| Net margin assumed to range between 47.3% – 47.9%. | Net margin assumed to improve to a range of 51.4% – 54.2%. | Improved GP margins and better cost control. |
At RM3.10, the market is valuing UCHI at 16.0x PE on our base-case assumption that UCHI will generate RM86.9m profit in FY2021 (FY2020 net profit was RM83.8m).
Considering the limited downside, and its significant upside potential if they manage to expand on its biotechnology segment, we view UCHI as an ideal investment target with an achievable return of 20% – 30% (PE at 20x) in 2021.
Currently, the market is under-valuing UCHI, as compared to the valuations on technology and electronic manufacturing services (“EMS”) companies. Further, UCHI is one of the few tech/EMS companies that can deliver a strong and consistent dividend yield of ~5% p.a.
Disclaimer
I am/we are long UCHI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including a detailed review of the companies’ Bursa filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication and are subject to change without notice.
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