Memtech International (MTEC SP) - UOB Kay Hian 2017-04-25: An Under-Appreciated Gem

Memtech International (MTEC SP) - UOB Kay Hian 2017-04-25: An Under-appreciated Gem MEMTECH INTERNATIONAL LTD BOL.SI

Memtech International (MTEC SP) - An Under-appreciated Gem

  • Companies operating in the precision engineering space experienced a sector rerating over the last few months, driven by stronger 2H16 results and M&A interest.
  • Memtech remains one of the sector laggards. Memtech’s earnings momentum is likely to continue into 2017 and investors can look forward to continued earnings momentum, increase in dividend frequency and potential dividend surprises. 
  • M&A remains a possibility given the automotive exposure and strong cash flow.



INVESTMENT HIGHLIGHTS 

  • Initiate coverage with a BUY and PE-based target price of S$1.05. 
  • Despite our conservative earnings forecasts, Memtech International (Memtech) is trading at a compelling 8.6x FY17F PE with an attractive dividend yield of 4.4% for FY17.

Sustained earnings momentum into 2017. 

  • In 2014, Memtech made a strategic decision and progressed into the more sustainable automotive supply chain. We expect Memtech to sustain its earnings momentum from 2H16 into 2017, driven by new project wins and larger orders from existing automotive customers. 
  • 1H16 was a weak period for the company due to a production delay for the Beats by Dre (Beats) headband. However, we expect a yoy turnaround in 1H17.

Potential 2017 dividend of at least 3.5 S cents/share (4.4% yield) with possibility of more. 

  • Given Memtech’s strong balance sheet, consistent dividend track record together with a potentially strong 2017 performance, we posit that the company is very likely to reward shareholders well through a bigger dividend this year.

High entry barriers and customer stickiness. 

  • The precision engineering segment has high entry barriers due to the technical know-how involved. In addition, the segment requires intensive capital investment followed by large reinvestment needed to keep up with new developments in a constantly evolving industry. 
  • Long lead time before entrants are qualified and multi-year contract awards make for high customer stickiness. This combined with Memtech’s unique strength in both precision plastics and rubber, creates a natural economic moat for the company.

Move towards functional components will propel automotive margins upward.

  • Memtech is making a conscious effort towards winning more functional component contracts where margins are typically higher. 
  • Currently, functional parts account for about 25% of Memtech’s automotive sales and decorative parts account for the remaining 75%. Management has set a target to derive 50% of its automotive sales from functional components and 50% from decorative components by 2019.

Fortress-like balance sheet with US$24.7m net cash position with a consistent track record in paying generous dividends. 

  • Memtech ended 2016 with a net cash position of US$24.7m (S$34.6m) vs its market capitalisation of S$111m. This means that 32% of Memtech’s market value is backed by cash
  • We expect Memtech’s conservative management to continue to adopt very prudent balance practices moving forward. Memtech has never stopped paying dividends to shareholders even when faced with challenging conditions.

A potential M&A target. 

  • With the recent M&As for precision engineering firms with substantial automotive exposure (Spindex and Innovalues), Memtech certainly fits the bill with 44% exposure to the sector. 
  • Generating substantial free cash flow with a solid balance sheet, we believe Memtech fits the M&A profile well at compelling valuations.




Nicholas Leow UOB Kay Hian | http://research.uobkayhian.com/ 2017-04-25
UOB Kay Hian SGX Stock Analyst Report BUY Initiate BUY 1.05 Same 1.05



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