Update on Uchi

Uchi-Tech

The latest financial result has came out. I had expected that the revenue will fall, but the result is slightly below my expectation. I had expected a revenue of USD 6 million and earning per share of 2 cents.

Regardless, all is not lost.

Though the result of Q1 (first quarter) is quite dissapointing for me, but the fiscal financial result for fiscal year 2009 will be the collective of 4 quarters. Since we know that the 1Q is the worst period during this recession, then the other quarters Q2, Q3 and Q4 will give better result compared to Q1 barring any unforseen circumstances. For all we know, the sign is getting positive. Example - Home Starts, Leading Index Probably Rose: U.S. Economy Preview

Second quarter may stil be slow. But, I have written before the 4th Quarter is the estimate period of earning breakthrough the recession deadlock and grow positively, contributing to the dividend. With some probability, 3rd. may also be a blessed one for investor of Uchi.

More so, one important element of Uchi's balance sheet shows zero debt and is never near bankruptcy stage.


To understand Uchi performance last year and this year, let understand what Uchi does and it's relation with the economy. Uchi makes electronics products which is then assembled into electrical appliances and sold mostly in Europe and USA. The recession that we faced today started in USA in December 2007. It is also noted that the peak of the recession is at the first quarter of 2009. Consequently, the effect of recession do has a certain effect on Uchi's earning. Hence, this can be expected to be reflected in Uchi's profit and loss account.

Let see some of the highlight of Uchi performance along the quarters when the recession starts.



From the above table, when US recession starts in December 2007, it's effect is reflected in the 1Q of 2008. When the recession peak, it effect is reflected in the 1Q 2009.

The profit after tax (PAT) at 1Q 2009 is a mere RM 2.7 million compared to RM 18 million in 1Q 2008. It suggests that the fix cost of Uchi is approximately around RM 9-10 million ia quarter or RM 3 million a month. Uchi will achieve economic of scale when the revenue is around RM 26 million. (The effect of exchange rate is not discounted).

If the recession situation improve from (Q1 2009 to Q4 2008) for the 3 three consecutives next financial quarters, then a dividend rate of 10 sen per share (next year) can be achieved for fiscal year 2009. I am hopeful that this occurs as within my expectation.

However, if the economic situation does not improve, then Uchi management needs to do some cost cutting measures. Amongst the cost cutting measure are:-

• Embark on "reducing wastages" campaign and instill saving culture mentality.
  
• Offering the staff a reduction of salary with reduction of working time.
• Reduce the perks and benifits of the directors and management.
  
• Withold salary increase until situation improve.
• Renegotiate other fixed cost element such as rental of offices, land or equipment (if any).

I am quite confident that once the economy pick-up in the third quarter of 2009, Uchi's revenue and earning per share (thus dividend per share) will increase. This will satisfy the dividend criteria of long term investor. Even, at this less EPS and without any gearing, Uchi situation looks alright when compared with other companies . (such as IOI Corp. which has hugh gearing (debt), higher PE ratio multiples and lesser dividend rate of return (due to too high a price))

The Effect of Swine Flu on Economy

Investing is very abstract. Investors sometimes get caught with future event which is not foreseen at present. An example of an investment disaster is the effect of Kobe earthquake on the investor community. Kobe earthquake became the triggering point of a mass selldown in Nikkei even at that point, everything else was well. It caught many with commitment to margin, burnt and devastated. Many people still remember how it triggered the bankruptcy of Baring Bank due to the failure of it's currency trading department headed by Nick Leeson. While the former was bankrupted, the latter was jailed. Nevertheless, one important element of the bankruptcy is due to it uncovered exposure to japanese yen. Meanwhile, though it affected Nikkei index significantly, it only affects other world stock indices lightly.

With that historical frame of mind, I tried to research some facts regarding the swine flu pandemic to gather a conclusion on its effect on the world economy.

The 2009 Swine flu pandemic originated from Mexico and as at 30th of April, 11 countries has confirmed cases related to swine flu with 800 global caseload and 20 death, thus with mortality rate of 2.5%.

In order to contain the infection, Mexican President, Mr. Felipe Calderon ordered a partial shutdown on Mexico economy by asking the people to stay at home for 5 days. His order is logical and necessary but a little bit too late. Nowadays, people mobility is faster than the restraining order due to the convenient of air travel Eighty percent of the cases of swine flu outside Mexico comes from people who visited Mexico. Indeed, it has some capability in affecting other countries' economy if the same restraining order is given world wide.

Presently, there is a restraining order, but only localised at international airport. The health authorities either try to detect the symptom of swine flu either through passenger's declaration or termography unit or quarantine the passengers at the airport or some other localised place. It is still dependent of one factor - how smart the virus can evade detection. If I place this into an equation it will be like this.

Effect on economy = A.(Percentage of people who brought the virus) - B. (effectiveness of detection) + C.(Ability of virus to avoid detection).

The equation means that if the percentage of people coming from flight who hosted the virus is large, unless the health authority is very efficient to detect the symptom of swine flu, then it will have a significant effect on the world economies.

Directly, it is a matter of "how confident we are on the health authority to contain the sickness".
If there is a high confident level, it means that any significant selldown is a opportunity to buy.
Reversely, any selldown may mean the reversal of the current bull market.

Let pray that the disease is contained in Mexico and at international airports not for the sake of investing but for the sake of our health and wellness :)