Uchitec : Expecting Recovery

Uchitec was started up in Taiwan by 2 brothers and set up their manufacturing site in Malaysia in the 80s. The Group is principally involved in OEM and ODM, specialising in the design of electronic control systems. The electronic control modules are developed and manufactured by the Uchi Group for MNCs such as Eugster, Krups, Bosch, Sartorius, Eppendorf etc. These companies are global leaders in electrical and electronic products such as precision weighing scales and household appliances such as fully automatic coffee machines, semi-auto coffee machines, steam iron etc. (Taken from their website.)

They were in their prime in the early 2000s, stocking up an amazing cash hoard which they generously distributed back to their shareholders. Their policy is a minimum of 70% payout of their EPS. But recent years starting from 2007, their revenues and EPS is on a decline reaching the lowest in 1st quarter 2009. But they still maintain a high dividend payout almost matching their EPS FYE2009.

FYE 2009 saw their revenues and profits plummet to new lows and hence their share prices as well concurrent with the financial crisis. It was reported their customers were also holding back orders due to new Euro quality standard changes which requires all new electrical products to have a lower maximum standby power consumption of less than 1 watt. These changes in addition to recognized forex losses and the financial crisis has not affected their ability to generate cashflow however. Cash levels is still above RM100 mil even after high dividends payout and best of all the company is debt free. End of year saw some consolidation and subsequent rise in orders which translated to a recovery of EPS.

On top of being debt free and a hoarder of cash, the company also enjoys tax free revenues incentive from their products from 2008 which lasts for 5 years. This is due to their pioneer status for their products which they researched and develop themselves. This is the strenght of Uchi Technologies which allocates up to 7% of total revenues to their R&D according to their annual report. Management is optimistic FYE2010 as their orders have increased and their new products all adhere to the EURO standards of quality achieving the 2013 target standard of less than 0.5w of standby power.

However the strengthening RM against the USD and EURO will have a negative effect on margins as Uchitec is an exports driven company. The lingering effects of the financial crisis is still being ironed out in EURO and consumer demands have not recovered. Management FYE 2010 expectations are that it will maintain a strong balance sheet and increase their revenues and profits. So far 1st quarter results are encouraging but not sufficient to prove they brushed off their lagging performance in 2009.

Expectations and risks.

I expect Uchitec to grow quarterly in revenue and profits FYE2010. If they can ahieve a 11-13 sens EPS, that would justify the current entry price of RM1.35. Please do note that their current cash with no debts accounts for about 33 sens in NTA. I don't value this stock based on PER mainly because of their dividend policy. As their dividends are high, the per annum returns will exceed 7% if the PER is only 10x. Since there is no risks of debts, the company will only grow based on costs cutting measures and demand for their products. It's like betting on the European economy or rather their consumer behaviour. Tax free status until 2013 is a bonus advantage this company enjoys.

Past 3 months have seen the stock fluctuate between RM1.21 and a current high of RM1.38. Historically the stock has seen prices above RM3.30 in 2007 and a low of RM0.80 in 2009. Planned entry below RM1.30 is great as an EPS of 11 sens would constitute a minimum 7.7 sens dividend which will translate to at least 6% dividend. Though an optimistic investor would buy now even if they think the EPS can improve beyond 20 sens FYE2010.

Past performance

2007

EPS = 20.91

Dividend = 12 sens + 8 sens special

2008

EPS = 15.75 sens

Dividend = 12 sens

2009 Worst year

EPS = 7.27 sens

Dividend = 6 sens