Sunday, March 8, 2009

Uchi Tech Shares


I was having a debate with Moola and HCC on the "Where Ze Moola" blogspot  regarding Uchi Tech prospect. 

They have rightly pointed out that :-

a) Uchi was giving out too many ESOS in 2007.
b) Growth in revenue is slowing and thus earning is slowing.
c) Dividend payout is getting smaller. 

The picture painted was gloom and doom for Uchi. It's price in 2007 was RM 3.14 and at last Friday it was traded at RM 0.90, already an increase of 16 sen after it announces it's second dividend for last year financial result. 

The reason that I was interested in this share is due to it's dividend yield at current market price. Total for 2009 dividend is 12 sen which carries a yield of 12% at cost price of RM 1.00

However, those people over there argued about it's yield for next year at today's cost price. The questions posted by them are 

  •  The yield cant be sustained for next year as the recession looms.
  • Earning will be reduced.
  • Prolonged recession may hurt Uchi's earning in the long run.

While it is true that recession do in affect Uchi's earning, the magnitude of this effect is unknown or uncertain. Currently we have 2008 quarterly data and an estimation of Q1 2009 for analysis.

First, let me help to derive an equation to calculate the dividend of the company

The calculation of dividend of any company is detailed as below :-

Div.= (Dividend payout ratio)(Revenue -Operating Expense )(Tax)
                                        Number of shares.

For Uchi, assuming dividend policy of 70% payout ratio is continued and no change in tax structure , as well as no change in number of shares (since ESOS cant be exercised at this price),
then all three component's above are  constants .

Let me denote the constant as K, 

where K = (Dividend PayOut Ratio)(Tax)
                               Number of shares

This lead to the above equation simplifies to :

DIV = K (Revenue - Operating Expenses)

Operating expenses consist of fixed cost and variable cost and it can be expressed in revenue. 

In term of revenue vs operating expenses, the distribution of revenue against operating expenses shall be studied before assuming the relationship between revenue and expenses. It may have a sigmoid relationship, exponential relationship, quadratic relationship or linear relationship.

For example, if the relationship is linear, then earning can be expressed in term of revenue by a linear equation. Let R = Revenue and E = expenses, this derives :

   E = m R + C 

So, by substituting E into the above equation, we have over here :-

DIV = K (R - mR- C) = K [ R(1-m) - C]

The variables that influence R are quite abstract and unknown. Though, many in technical analysis uses time series, I prefer not to use time series because there is a high error due to the fact that time series ignores the variables that influences revenue. It is simply too simplified..

In this article, I am using GDP growth and exchange rate as the independent proxy variables for calculation of revenue (dependent variable).

Assumption can be made by using GDP growth and exchange rate. (If you know any other variables that can be thought of, please do share).

 GDP growth reflects the economic situation and directly correlated with the market growth, whether the market will inflate or contract. A positive GDP growth inflate the market and negative GDP growth deflate the market. Since Uchi's product is sold in the UK, then GDP growth of UK is nearer to Uchi's revenue and a good proxy to be used in the calculation.

Exchange rate have a 100% correlation with Uchi's revenue due to the fact that Uchi's sales is quoted in term of USD.

More variables should be used if data permits to reflect the competion in the market, bargaining power of supplier, bargaining power of buyer, new product entry by competitor and product substituton. But this data is hard to be obtained unless one focussed 100% on this work.

Basically in this case, I am assuming only GDP growth and exchange as the variables, and their correlation with revenue can be expressed as below:-

Then R = (Sales in USD)*( Exchange Rate USD/RM) + GDP + Constant

A multiple linear regression method can be attempted. 

This comes to the final equation of 

DIV = K [ (Sales in USD)*(Exchange Rate) + GDP + constant) (1 - m) - C]

The final equation managed to express dividend in term of sales in USD and exchange rate.


Let us use a case study based on Q3 and Q4 GDP growth and RM/USD exchange rate in 

At 2008, Q4, the GDP contracted at -1.5% and exchange rate of 3.4 (average), the revenue is RM 25.8 million. 

At 2008, Q3, the GDP growth  is at 0% and exchange rate is 3.226(average), the revenue is RM 26.7 million.

It is clear that negative growth affect the revenue negatively even though the exchange rate work the opposite effect on revenue.

At 2009, Q1, the UK's GDP growth is estimated at -1.9% and the exchange rate is 3.7.

For 2009, UK's GDP is expected to be within -0.75 to -1.25 GDP growth overall for 2009. Based on that, at Q1 2009, the revenue is expected to be the least in 2009.  And slowly rebounding in Q3 and Q4 2009. 

As per conversation with a personal in Uchi, at end of February, the revenue stood at roughly USD 6 million. At 3.7 exchange rate, this contribute to an earning of RM 22.2 milllion. A clear statement that earning will reduce again in Q1 2009.

But looking ahead, for estimation of the above overall GDP growth in 2009 to be true, the negative growth shall be less in Q2,Q3 and Q4 or perhaps we shall see positive growth in Q4.

Shall this mean, earning will increase in Q2, Q3 and Q4 compared to Q1 ? It is yet to be seen and proven.

Nevertheless, with the above typeof expected revenue, my target for this year Uchi's EPS is 12 - 13 sen, with that type of EPS and dividend policy of 70%, I am hoping for a dividend of 9 sen to 10 sen per share. And at today's current price, this dividend yield is quite lucrative.

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