Memtech International (MTEC SP) - UOB Kay Hian 2017-05-30: On Track For A Bountiful Year

Memtech International (MTEC SP) - UOB Kay Hian 2017-05-30: On Track For A Bountiful Year MEMTECH INTERNATIONAL LTD BOL.SI

Memtech International (MTEC SP) - On Track For A Bountiful Year

  • We paid a visit to Memtech’s Nantong factory facility in China to gain a better understanding of Memtech’s operations and in particular, the liquid silicone rubber production. 
  • With manufacturing peers such as Sunningdale and Hi-P undergoing another round of sector re-rating, Memtech’s valuations remain very compelling at 0.9x 2017F P/B and 10.6x 2017F P/E. 
  • Maintain BUY but with a higher PE-based target price of S$1.15.



WHAT’S NEW


Nantong factory operations. 

  • We paid a visit to Memtech’s Nantong factory in China. Memtech currently has 3 manufacturing plants in Dongguan, Nantong and Kunshan, China. We were pleased to note that factory activity remains high and the company is expanding its warehousing capacity.

In-house R&D key to survival. 

  • Memtech’s in-house R&D team specialising in material sciences has given the company a competitive edge in this ruthless industry.
  • The company holds more than 120 patents. Management remains optimistic on the prospects for the year.

Precision engineering sector enjoying positive re-rating. 

  • The precision engineering sector has undergone a positive re-rating over the last six months driven by a more favourable global macro outlook, improved market sentiment, positive manufacturing data and the hunt for privatisation candidates. 
  • With peers such as Sunningdale and Hi-P trading at above book valuation, we believe the market has overlooked Memtech’s prospects given the company’s strong sustainable earnings growth with a formidable net cash position.


OUR VIEW 


Liquid silicone rubber (LSR), the crown jewel. 

  • One of the key research outcomes from Memtech’s in-house R&D team was the in-house manufacturing process for liquid silicone rubber which allowed them to break into the Beats by Dre supply chain.
  • Our channel checks indicate that Memtech is one of the world’s leading precision engineering manufacturers of LSR products. With automakers looking for ways to maximise fuel efficiency, LSR which is lighter than metal could possibly be a game changer in the industry. It would not surprise us if Memtech would become the subject of any M&A activity given their strong LSR capabilities.

Trading at an unwarranted discount to peers. 

  • With a dividend yield and ROE comparable to that of peers such as Sunningdale, Hi-P and Fu Yu, we believe the market has overly discounted Memtech’s prospects. We expect Memtech’s general discount to peers to narrow as the stock continues to re-rate in the quarters to come with more positive results.


STOCK IMPACT

  • No change to our earnings forecasts.


RECOMMENDATION 

  • We maintain our BUY rating on the company but with a higher PE-based target price of S$1.15 which is pegged at a higher sector 2017F PE of 12.5x (previously 11.4x).
  • Investors can look forward to a sustained earnings momentum, increase in dividend frequency and potential dividend surprises. 
  • With M&A being a distinct possibility given strong interest in the precision engineering sector, we reiterate our view that should any privatisation occur, we could see further upside to our target price as recently privatised peers such as Spindex, Innovalues and Chosen were taken private at above book valuation.




Nicholas Leow UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-30
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.15 Up 1.050



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