UCHITEC (7100): Author's Review

As a primarily Original Design Manufacturer (ODM), Uchi Technologies Berhad specialises in the design, research, development and manufacturing of electronic control systems, including software development, hardware design and system construction.

It is an one-stop solutions provider offering an entire spectrum of services and solutions – ranging from research & development, tool design and set-up to engineering support and the production of finished electronic control systems.

There are three operating sites which fully owned by UCHITEC:

1. UOM – the main operating plant located in Malaysia, principally involved in design, research & development and manufacturing of electronic control modules
2. UEM – the assembly counterpart for UOM
3. UCHI Dongguan – also the assembly arm of UOM located in Dongguan City, GuangDong Province of China Asthe main subsidiary

Both UOM and Uchi Dongguan are ISO9001, ISO14001 and OHSAS 18001 certified.

UCHITEC exports more than 94% of their products to European market, with the rest being sold in US, Japan, China and India.
Switzerland remains as the biggest customer to UCHITEC with a contribution of 44% revenue during the year of 2018 (2017: 46%), followed by Portugal at 37% and Germany at 13%.

The Group’s revenue is denominated in USD, with an approximate 30% of it being allocated for payables in USD-natural hedge.
The balance 70% is exposed to currency fluctuation and is managed via a Forward Contract Management Policy.

Financial Highlights

Over the past 5 years, the profits before tax are in-line with the revenues. 

There are three product groups categorised under UCHITEC's business:

• The art-of-living product group, comprising electronic control systems for household appliances as well as professional appliances for office and office services sector
• The biotech products, including electronic control systems for high precision weighing scales, centrifuges, pipettes and deep freezers
• Others i.e. new innovations

Generally, there were no significant changes to the revenue analysis by product group in 2018 compared to the prior year, with the contribution rate from the art-of-living product group, continuing to take the largest slice of the pie at 81% (2017: 84%).
Consequently, there was a slight increase in the percentage of contribution from Biotech products at 18% (2017: 16%).
Meanwhile products in the Others category made up the balance of 1%.

UCHITEC has continuously achieved profit margins of more than 40%.
The Group once hit the 50% profit margin in year 2017.
When it came to year 2018, UCHITEC still able to maintain a net profit margin of nearly 50%.
Besides, the management has reported that the Group achieved a 0.12% customer reject rate in 2018, which surpassing the initial target of 0.15%.
This has marked the sixth consecutive year that the Group has recorded a customer reject rate of below 0.20%.
Anyhow, the Group remains their target for year 2019 at 0.15%.

There was only a slight increase in material cost (2018: RM44.2 million; 2017: RM43.5 million) despite the 9% increase in USD revenue.
This can be attributed to the strengthening of the USD against the RM, which resulted in lower
material cost in RM.

However, a trade war between US and China has caused a global shortage of multi-layer ceramic capacitor (MLCC) components and labour shortages.
This has impacted the Group in on-time shipment performance, which deteriorated to 53.51% (2017:
88.81%).

Meanwhile, the Group has successfully mitigated RM463,048 electricity costs with Grid-Connected Photovoltaic Power System, which was installed since 2016.
This Solar System continues to fulfil commitment to reducing carbon dioxide emission by an estimated 451 tons in year 2018.

Ever since the Group's listing in year 2000, the Group has recorded an average Operating Profit Margin of 45%, despite going through challenging economic scenarios that include the global economic downturn, foreign currency fluctuations and technical challenges.

A cornerstone of the Group’s operations is research & development.
The Group has allocated a budget of 7% of their revenue in research & development activities.
In 2018, RM4.3 million was spent for this purpose (2017: RM4.1 million).

UCHITEC has completed a capital repayment of RM89.7 million to their shareholders in 2018.
The Group intended to return excess cash to their shareholders as a reward for their continuous support through the years.
Other than resulted in reducing of shareholder's equity, there is no change in its financial standing, including cash and cash equivalents, reserves and zero gearing, future financial obligations and operational requirements.

Future Outlook

1. As most of the manufacturing plants facing, manpower shortage is an issue for UCHITEC. The Group plans to address this issue by outsourcing production processes or engaging contract manufacturing services.
2. Although the MLCC component shortage has been moderated, the Group anticipates that the effects of the shortage, together with the US-China trade tension, will continue to reverberate in years to come, potentially causing further material price fluctuations and global shortages of other components. In view of this, The Group is taking several preventive measures, including the implementation of a Safety Buffer Stocks System, for long lead time components in order to facilitate the operations.
3. The Group opts to review the timing, trade terms and country of origin provision in their contracts, while also expanding our supplier base to include South East Asian countries. 
4. The Group also aims to evaluate the demand forecast and enhance visibility to their suppliers.
5. Besides, the Group shoring up the supply chain by seeking alternative supply sources and consistently performing contingency and scenario planning.

Author's Perception

1. It has been the Group’s Dividend Policy to allocate at least 70% of their net profit as dividend since 2003. Total dividend declared for 2018 is 14 sen (2017: 25sen), which is equivalent to a payout ratio of 91%. Thus, it is expected good dividends when the Group's business grows.
2. In terms of business nature of the Group, households and office appliances, as well as biotech products are generally always a demand in market. As a manufacturer of electronic control system of these products, it is no doubt that the Group able to achieve continuous growth as long as the consumers' ability to spend remain strong.
3. The revenue of the Group is 100% in USD, while material cost is nominated in RM. The business will see benefited when USD goes strong.
4. UCHITEC is a debt-free company without a single borrowing. It is a cash rich company. 
5. The top thirty shareholders occupied the market shares in 55.76%. Technical trend is generally significant for this stock.

Technical Comment

The current share price has moved into correction waves.
The resistance line is at RM2.90 (Red Line).
As long as the price is still moving above the support line (Blue Line), this stock is still in a bullish trend. 

WELLCALL (7231): Author's Review

Wellcall Holdings Berhad is the largest industrial rubber hose manufacturer in Malaysia. They have expanded their application markets into abrasion, air, automobile, chemical, food grade, marine, petroleum, fuel & oil, water, welding and miscellaneous. In other word, rubber hose is needed in any kind of industry.

Based on 2018 Annual Report, 89% of the group's revenue covering over 70 countries while the remaining 11% was contributed from domestic market. Hence, the global market sentiment will reflect on its revenue performance.

Financial Highlights

5 years revenue and PBT CAGR is about 3.2% and 2.0% respectively. Which is not considered as an aggressive growing company, the management is taking a steady and slow pace in managing its business. Gross margin for FY 2018 is around 32%, in this kind of competitive market, Wellcall can still sustain such high gross margin is worth to praise. Also, management have enough room to compete with competitors to secure the market pie. Dividend yield stands at 4.7% with the present share price of RM1.17. Book value to price is 18.5%. The current price is not attractive enough, slow and steady growth company usually will not bring up the share price value, 4.7% of annual return sounds less interesting, unless it is for long term investment. At the moment, the share price is still expensive. 

Net earning per share for FY18 has reduced by 13% compared to FY17. The main reason is due to pressure from the raw materials prices that continue to fluctuate which has resulted the group to incur higher cost of production. 

Comparing latex price for 2017 to 2018, FY18 was having lower material cost compared to FY17.  We can eliminate the risk from fluctuation in rubber price, as the group is enjoying lower material cost.  

Some hoses require synthetic rubber which produced from crude oil as raw material. We reckon that the high material cost incurred in FY18, resulting a lower PBT achieved in this financial year is partly from synthetic rubber which related to crude oil price. The crude oil price graph has shown that the price was high during FY 18 compared to FY 17.   

Market segment for Wellcall consists of export and local. The major export countries are USA/Canada contributing 28% of the export revenue, following with Europe 19%, Asia 17%, Australia/NZ 13%, Middle east 11%, South america 9% and Africa 2%. 

Hence, foreign currency plays a main role in its revenue and PBT performance. 

Strengthening of USD/RM by 10% will bring 4% increase in group's net profit. 

The latest 2nd quarter report of FY 19

EPS for 1HFY19 is 3.54sen which has increased by 25% compared to preceding year. It has achieved 55% of the FY18 result. 

If the demand for industrial rubber hoses continue to recover gradually from both emerging and developed economies, let's say we forecast a 3.2% growth for its business, the target EPS should be at 6.57sen. 

We expect 2HFY19 should hit a minimum of 3.03sen EPS. 

With the PE value at 17, the expected target price is about RM 1.12. 

Hence, current share price is slightly above the TP. Continue to observe on the price movement.

Technical Comment

We forecast that the crude oil price will trend down toward the year end. Hence, raw material cost will see reducing for Wellcall. 

Share price is still moving in a major bearish trend. 

At this moment, Wellcall share price is not worth to accumulate. We will see the trend turn upward if USD strengthen and Crude oil price drop towards the end of the year. 

Corporate news:

Wellcall charts another milestone when it inks a joint venture with Sweden’s Trelleborg Holding AB – a world leader in engineered polymer solutions provider.

This synergistic partnership will see Trelleborg transferring its technology and manufacturing know-how for the production of composite hose and fittings, enabling Wellcall to manufacture, market and distribute the hoses and expand its product offerings.

Currently, Wellcall produces extrusion, mandel, and spiral hoses in its three plants in Perak.

Industrial rubber hoses are used in construction, mining, automobile, oil and gas, marine, as well as the food and beverage industries.

Wellcall is in discussions with Trelleborg for the target production capacity and product pricing.

“Our focus this year will be to set up the composite hose manufacturing plant, targeted for commissioning by end-2019, with two production lines and auxiliary equipment.

“Composite hose is lightweight, flexible, pressure and vacuum-resistant, mainly used in the transfer of petroleum and chemical.

“It is also a cost-effective hose, as it does not require curing like rubber hoses,” says Huang.

The composite hose manufacturing plant will be built within the vicinity of Wellcall’s existing plant.

The initial issued and paid-up capital of the joint venture (JV) company, Trelleborg Wellcall Sdn Bhd, is US$2.2mil (RM9.2mil).

Trelleborg will own 51% equity in the JV company, while Wellcall the remaining 49% equity.

Both parties will be jointly liable for their respective shares of funding for the JV company.

https://www.thestar.com.my/business/business-news/2019/01/19/wellcall-gets-technology-boost-from-swedens-trelleborg/ 

YOCB (5159): Author's Review

Yoong Onn Corporation Berhad (YOCB) is a leading integrated designer, manufacturer, distributor and retailer of home linen and bedding accessories in the region.

Backed by over five decades of experience, YOCB has more than 10 main brands of home linen for premium to mid-range consumers to date.
Their well-established brands include Novelle, Jean Perry, Ann Taylor, Louis Casa, Genova, Niki Cains, Diana, and Cotonsoft.

YOCB provides home ware and lifestyle furniture to complement own-manufactured home linen and bedding accessories, such as:

• Bed and bath linen; 
• Bed, bath, living room and kitchen accessories; 
• Rugs, carpets and floor mats; home ware; and
• Lifestyle furniture.

Bed linen and bedding accessories made up the bulk of the Group’s revenue.

The range of products export to more than 17 countries namely Australia, Brunei, Cambodia, Dubai, Fiji, Indonesia, Japan, Mozambique, New Caledonia, Nigeria, Papua New Guinea, Philippine, Singapore, Taiwan, Thailand, Turkey and Vietnam.
However, the Group’s domestic operations still remained as the main driver of its revenues and profits.

YOCB's target markets including:

• Third party retailers i.e. departmental stores, hypermarkets, supermarkets and specialty stores;
• Mass end-consumer market through their fully owned retail outlets under the 'Home’s Harmony' and 'Niki Cains Homes' brand name;
• Institutions including hotels, resorts, hostels, hospitals, royal customs and military accommodations and cruise ships;
• Intermediaries including distributors and importers in oversea countries; and
• E-commerce platform companies on online shopping.

There are total 4 divisions under YOCB.
Distribution and Trading generally played the largest part of total revenue gained, which is more than 60%.

Financial Highlights

Over the past 4 years, although the revenue figures were up and down, YOCB managed to earn better profit by years.

In profit margin wise, slightly improvement is expected for FY2019 as Hari Raya festive season drops in June (Q4) this year which should pull up the overall performance.

YOCB has successfully acquired positive growth for 5 quarters continuously. 

It is expected another green quarter for Q3 2019 upon the new retail store opening in EkoCheras Mall.

Future Outlook

1. The Group has actively participated in the Government’s rehiring program and sourcing from other local authorised agency to meet labour needs. Long term wise, the Group opted to reduce dependency on labour by increasing automation.
2. As a brand owner, the Group is not subjected to the full impact of competition from lower cost producing countries like Vietnam and China. In fact, these lower cost producing countries could work to the Group’s advantage to maintain competitiveness as the Group could outsource their products to overseas contractors if the need arises. 
3. The Group recognises the importance of regularly introducing new designs for home linen to be in line with the current trend.
4. The Group maintain foreign currency bank accounts for business transactions in the respective foreign currencies. This approach forms a natural hedge to minimise foreign currency exchange risk exposure. The Group also have forward contracts which serve as a hedging instrument for some of the imports purchases.
5. The Group endeavours to source its raw materials locally in future.

Author's Perception

1. The business is dependent on currency rate of USD against MYR, as majority materials such as textile fabrics and cotton fibres are denominated in USD, while local market is the main driver of the business. Hence, good profits can be predicted if USD is depreciate against MYR.
2. It will be a bonus if the Group able to do more exports in the future. This will eventually reduce the impacts of currency rates to the business.
3. The business nature of the Group are generally categorised in retail sector, which are subject to seasonal variations such as major local festive seasons, school holidays and carnival sales. Usually Q2 (Oct-Dec: Year-end carnival sales) and Q3 (Jan-Mar: Festive season) will perform better than Q1 and Q4, where the Group called it dull season.
4. Thirty largest shareholders owned up to 85.37% of total shares. Thus, the share price is comparably less fluctuate. Technical trend will be less reliable for this stock.
5. Current share price (RM1.18) is 0.84 times undervalued to its NTA of RM1.40.
6. Dividend yield of approximately 3.4% (4 cents average yearly) would be more attractive if to be further improved.

Technical Comment

Although there is no significantly different in pricing, it is observed that MACD lines are moving closer to each others and CCI has started to move into positive range.
It seems to be going into bullish trend soon.
It is expecting the price to rise until previous high at RM1.24. But due to low liquidity of shares in market, it takes time to reflect the true value of this stock.

KGB (0151): Author's Review

Kelington Group Berhad (KGB) was founded in 2000 to provide Ultra High Purity (UHP) gas delivery solutions to the electronics and semiconductor industry.

The Group is then positioned as a one-stop facility solution provider of turnkey engineering services from the initial system design up to maintenance and servicing after completion.

The Group expanded within the past 19 years and having business divisions of:

1 Ultra High Purity (UHP) Gases Delivery System

• Bulk/special/chemical gas delivery system; 
• Gas detection and SCADA; 
• Exhaust system

2 Process Engineering

• Tankage construction; 
• Underground pipelines; 
• Equipment fabrication; 
• Steel structure fabrication

3 Industrial Gases - Supply to electronics, semiconductors, food processing, and oil & gas industries

4 General Contracting

• Civil construction works; 
• Cleanroom construction

According to the Group, Division 1 and 2 delivers higher profit margin than the rest.

KGB has a total workforce of around 300 and has regional offices in China, Taiwan, Singapore and Malaysia. It is a registered contractor with Construction Industry Development Board (CIDB) Malaysia and is certified to ISO 9001:2008 and OHSAS 18001:2007.

Certification is important to mention, as it reflects a company's status in terms of regulatory requirements and its potential to grow.
ISO 9001:2008 is focused on meeting customer expectations and delivering customer satisfaction, as well as continual improvements.
While OHSAS 18001:2007 ensures health and safety of employees and workplace.

To-date, the Group has accumulated a vast track record of completed projects for a myriad of international clients in Malaysia, China, Taiwan, Singapore, Philippines and Indonesia.

Financial Highlights

Over the past 4 years, KGB has escaped from profit-lost history and recorded 3 years continuous growth in profit, as well as profit margin.

In view of net profit for FY2017 and FY2018, KGB has achieved growth in 7 out of 8 quarters reported.

Even the only negative quarter was due to the Group has started their new direction to selectively bidding projects which carry higher profit margin.

The Group's effort has been proven effective, when you see the Group generally earned better in FY2018 compared to FY2017.

In financial report Q4 2018, the Group highlighted the ability to pay off most of the short terms debts with a strong net cash position.

Additional Information

It is interesting to know that KGB is reporting impairment loss at least twice in yearly basis.
The impairment loss was incurred from non-received receivables, as well as due from customer on construction contract.

Extracted figures from one of the quarter reports

Although the amounts seem non-significant to revenue gained (the most at approximately 5% over the revenue during Q2 2016), the shareholders would certainly happy to see if the loss could be improved over time.

Impairment loss claimed by quarter

Future Outlook

1. KGB's regional operations are mostly carried out in respective local currencies, thus the impact of currency fluctuations on the Group’s earnings has slightly mitigating.
2. KGB has secured first on-site 10-years nitrogen gas supply contract from a major manufacturer of solar cells and modules. The business has started to commenced since Q1 2018 and has contributed positively in revenue of Industrial Gases' division.
3. Moreover, revenue in coming Q3 2019 onward is expected to contain earnings from new project commencement - manufacturing of liquid carbon dioxide. The Group inked a supply agreement with Petronas to purchase its carbon dioxide gas waste from their Gas Processing Plant (GPP) for a period of 15 years, starting 2019. The Group is building a new state-of-the-art gas plant with a production capacity of 50,000 tonnes per year next to the Petronas GPP in Kerteh, Terengganu to purify and liquidify the CO2 gas waste emitted.
4. A RM93 million-worth new contract has just been confirmed from one of the world's largest gas companies to provide turnkey construction works in Singapore.
5. The Group continuously highlighted their confident to achieve strong order book replenishment.
6. To ensure keeping abreast with the rising competition, the Group has continuously focused on enhancing technical capabilities, improving operating efficiencies and maximising our resources.
7. Top thirty shareholders have owned approximately 70% of total shares in the market.

Author's Perception

• There are significant improvements in profit margin performance. The statement is in-line with the management's direction to only involve in bidding high profit margins' projects. Looking forward to double digits' margin in FY2020.

• Also, proven continuous improvements in terms of ability to pay off debts within short terms.
• The business is in healthy growth when new order book acquired is going stronger.
• However, current share price is approximately 2.83 times over-priced than NTA.

Technical Comment

KGB has started the bullish trend since April'18.

Currently, the price is moving in the third Elliot motive wave.

The price is technically expected to reach TP of RM1.80.

However, RM1.25 is a strong support line.

Should the price break below, the uptrend will be ended.

Looking at the short term perspective, KGB has recorded the highest price in history.
The price should stay above the uptrend resistance line to maintain the bullish trend.
Otherwise, it will create a sell down by short term traders for the sake of profit taking.
It will be the best timing to trade-in if the price rebound from the strong support point.

TP: RM1.80

Annjoo (6556): Temporary Bullish? Or Brighter Prospects' Steel Player?

Following the release of ECRL progressive news, the entire construction industry in Malaysia has undoubtedly been boosted up by the mega project.
With reference of graph above, Annjoo, as a material supplier to the industry, is performing bullishly ever since the beginning of year 2019.

Recently, steel industries are not making good business, though.
This is due to most players are facing oversupply issues and therefore incurred of massive losses.

Retrace to year 2015, where local steel companies had a tough time when steel products from China spread and eventually flooded the local market.
In their financial reports we could find that the industry was stacking up their inventories during that period due to noncompetitive pricing.

In year 2016 and 2017, local steel companies experienced a temporary reprieve.
It was reported that, strong earnings arose mainly from higher steel prices.
Thank to China government's policy of withdrawing 100 to 150 million tons of crude steel making capacity over a period of five years to battle excess capacity problem in China.

Annjoo was especially outperformed over other local steel players.
The Group has successfully brought in hybrid blast furnace electric arc furnace which helped the Group to improve its cost structure vastly.
Upon investment in this new technology, Annjoo was easily became the lowest costs' steel producer across the region.

The reprieve ended after the government switched over in year 2018.
Local market demand has soften, due to weak market sentiment.
It has been reported that inventories started to pilling up again among local steel players.
Whilst, the Pakatan Harapan government on hold several large infrastructure projects, this were akin to pouring fuel on a fire over local steel companies.

The competition among locals became more severe when China-backed Alliance Steel (M) Sdn Bhd set up the country's largest steel mill in Gebeng, Kuantan with an annual production capacity of 3.5 million tonnes of long steel products.

"
The local steel industry is centered on two major types of products — long and flat.
Long products — including billets, bars, beams, iron bar, rebars and wire rods are used in the construction and civil engineering industries.
The major local producers of long products are Masteel, Ann Joo Resources Bhd, Southern Steel Bhd and Alliance Steel.
Flat products such as steel slabs, hot rolled coil (HRC) and CRC are mainly used as raw materials for downstream applications in the automotive, oil and gas, machinery and equipment as well as other manufacturing sectors.
To put things into perspective, there are only two major steel players operating blast furnaces currently — Alliance Steel and Eastern Steel.

Annjoo is adopting the hybrid blast furnace and BF-EAF (blast furnace-electric arc furnace) technology and Masteel is also scaling up its operations in line with the installation of a new technological package.

In general, a blast furnace is three times more capital-intensive than an electric arc furnace (EAF) but its steel-making cost composition including raw materials is about 25% lower than the latter’s.

A quick check on steel industry portal www.steelonthenet.com shows that the conversion cost for basic oxygen furnace steelmaking was US$327.56 per tonne in 2018, lower than EAF’s US$430.60 per tonne.

In a nutshell, a blast furnace will have a better competitive edge than an EAF in the long run.

Note that an EAF uses 100% steel scrap as a source, whereas a blast furnace uses 95% iron ore and 5% steel scrap.
Scrap metal and iron ore are commodities and their prices tend to fluctuate, depending on supply and demand as well as international trade policies.
Interestingly, scrap prices diverged from iron prices last year as the Chinese environmental clean-up gained momentum and Chinese mills were encouraged to use more scrap than iron ore.

Also, the 25% tariff on steel imports into the US — one of the largest exporters of scrap has buoyed scrap prices internationally.
US mills are able to pay higher prices for scrap due to high domestic steel prices.

EAF offers more flexibility when there is a need to reduce output sporadically. “A blast furnace has bigger capabilities but is less capable of shutting down in times of soft demand, resulting in huge inventory holding costs."
"
Source: https://www.theedgemarkets.com/article/cover-story-better-times-ahead-steel-sector

Based on the latest quarter report from Annjoo Q4 FY2018, the PBT has became thinner due to the decline in selling price and inventories written down, mainly attributed to the oversupply situation domestically.
Excluding the recognition of compensation recorded in this quarter, Annjoo is actually making loss.
Management has yet to come out solutions to counter the price war with Alliance steel.

Therefore, I believe the current price movement will be just a short term rally.