CEI Limited - A new run rate
- Niche contract manufacturer focusing on low volume, high mix manufacturing; derives ~50% of revenue from the medtech/life science sector.
- Proxy for the growing medtech/life science industry.
- Maintain Add with P/E-derived (9.2x, 10-year average) target price of S$1.04.
Medtech and Life Science proxy
- CEI Limited derives ~50% of its sales from the medtech/life science sector; its customers’ products are used for chromatographs, analysers and atomic absorption.
- These products are typically deployed in the fields of drug discovery, materials research, food safety control, forensics and others.
- Many of CEI Limited’s key customers have been with the company for ~10-20 years.
A new run rate
- CEI Limited’s average annual revenue over FY01-05 was S$54.0m (US$40m). Over FY06-10, average annual revenue was S$85m (US$63m). Ten years after listing, its revenue crossed the S$100m mark in FY11, and expanded 10.6% yoy in FY14 and 9.1% in FY15.
- Better traction with its customers and the stronger US$ versus the S$ also helped revenue growth, as close to 100% of its sales are denominated in US$. Going forward, we believe this could well be the new revenue run rate for the company.
- The key business risk is order push-back by customers due to global economic conditions. The other major risk would be US$ strength versus S$, Vietnamese dong and Indonesian rupiah.
- Sales are almost entirely denominated in US$, while ~87% of its purchases are denominated in US$ and other foreign currencies. We estimate that a 5% appreciation of the US$ against the S$ could improve its gross profit margin by 0.5% pts, assuming CEI Limited gets to retain all the benefits.
- Potential re-rating catalysts include:
- better-than-expected earnings (CEI Limited reports on a half-yearly basis);
- winning more orders for its box-build business with medtech/life science customers; and
- clinching new medtech/life science customers.
- Given its fragmented shareholding structure and strong cash generation capability, we opine that the company is likely to be receptive to discussions from private equity firms who may have a fit for CEI Limited in their portfolio.
- We expect CEI Limited’s medtech and life science business to drive revenue growth of 5% over the FY17-18 forecast period. Assuming that gross margins can be stablised at 24-25%, core earnings growth over FY17-18F will average 10.2%.
- Taking into consideration the muted earnings growth and minimal capex, the company’s dividend track record could see investors being rewarded with 10-12% dividend yields over the next three years if our forecasts pan out.
- Based on its 10-year historical average P/E of 9.2x, we have an Add with a target price of S$1.04.