Memtech International - CIMB Research 2017-08-03: 2Q17 Preview ~ Gaining Yoy, Qoq Strength

Memtech International - CIMB Research 2017-08-03: 2Q17 Preview ~ Gaining Yoy, Qoq Strength MEMTECH INTERNATIONAL LTD BOL.SI

Memtech International - 2Q17 Preview ~ Gaining Yoy, Qoq Strength

  • Memtech International (MTEC) will report its 2Q17 results on 10 Aug, after market close.
  • We expect MTEC to record yoy and qoq improvement in its 2Q17F core net profit, vs. 2Q16’s net loss of US$1.5m and 1Q17’s earnings of US$1.7m.
  • AU and CE to drive double-digit revenue and earnings growth with better margins.
  • MTEC remains as one of our tech top picks in Singapore, given its technical knowhow, healthy financials, multi-year earnings growth and 3-5% dividend yield.
  • We raise our FY17-19F EPS by 0.8-4.7% and our Target Price to S$1.16; maintain Add.



Putting 2Q16 loss behind 

  • Despite seasonal weakness, we expect MTEC to report yoy and qoq improvement in 2Q17 core earnings, largely driven by growth in both automotive (AU) and consumer electronics (CE) segments, which account for 80-90% of its overall topline. 
  • Recall that the company recorded US$1.5m net loss in 2Q16, as a result of Beats’ project delays and other less profitable projects. 
  • We also expect the company to book a one-off gain of Rmb21.7m (US$3.2m) in 2Q17, from the completed sale of two land assets.


Sales visibility and volume from AU and CE segments, respectively 

  • MTEC’s breakthrough into the regulated automotive supply chain (2-year qualification process coupled with annual audit) marked its successful transition away from the keypad industry. 
  • We like this diversification as it gives revenue visibility due to automotive product lifecycle of 5-7 years, while consumer electronics segment offers tech manufacturing companies, such as MTEC, economies of scale from large order volume.
  • MTEC is still pursuing new customers for its existing clientele of Kostal, Beats and Tesla.


Key customers report positive growth and outlook 

  • We see little customer concentration risk for MTEC as its top 10 customers accounted for 60-65% of total sales in FY16, with no more than 20% contribution from a single customer. 
  • Our checks of the majority of these customers show that their sales growth and outlook remain strong, which should benefit MTEC as their component supplier and contract manufacturer. 
  • We also note that its sales tend to be back-end loaded in 2H.


One of our tech top picks in Singapore 

  • MTEC is one of our top picks among the SG tech sector coverage, given its capabilities in liquid silicone rubber (LSR) and multiple injection, strong operating cashflow, growing customer base and earnings profile. (See report: Tech Manufacturing Services - CIMB Research 2017-07-04: Upside Potential Intact For Our Top Picks)
  • We previously highlighted MTEC as an attractive M&A target with possible value range of S$0.84-S$1.74, based on acquisition multiples of Fischer Tech. At the current valuation of 9.2x FY18 P/E and 0.9x FY17 PBV, the stock looks inexpensive vs. peers’ average of 12x P/E and offers investors some safety margin.


Reiterate Add rating with higher TP of S$1.16 

  • As we raise our FY17-19F gross margin assumptions and tweak our operating expenses forecasts slightly ahead of MTEC’s 2Q17 results, our FY17-19F EPS forecasts rise by 0.8-4.7%. 
  • Maintain Add on the stock with a higher target price of S$1.16 (pegged to 10.4x FY18F P/E, still at 10% discount to peers’ average) and 3-5% dividend yield. 
  • We see room for special dividends from recently completed sale of land assets. 
  • Unexpected order delays or cancellations could pose downside risks to our Add call.


REVISITING OUR INVESTMENT THESIS 


Keypad solutions provider yesterday, plastic/rubber component solutions tomorrow 

  • Established in 2000 and listed on the SGX mainboard in 2004, MTEC was previously a keypad solutions provider to handset makers like Nokia and Sony Ericsson. The company subsequently qualified for the automotive supply chain; by leveraging on its fast turnaround (through dealing with mobile phone makers) and strengths developed in both plastic and rubber, it was able to build relationships with several established customers across auto, consumer electronics, telecommunications and industrial/medical segments. 
  • The company currently has three manufacturing sites in China – Dongguan, Kunshan and Nantong, with a combined area of 182,000 sqm.

Automotive offers sales visibility, consumer electronics volume 

  • In our initiation report of MTEC back in April 2015, our investment thesis for the firm was premised on its transition towards serving automotive customers, and away from the structurally declining handset keypad industry. Two years on, apart from seeing double-digit growth in automotive (AU) sales, consumer electronics (CE) also grew in importance, thanks to contribution from both existing and new customers. We expect such trend to sustain, with both segments representing 80-90% of overall sales.
  • While we like the AU segment for its earnings visibility (5-7 years’ product lifecycle) and customer stickiness (long qualification process and capital investments involved), CE segment offers technology manufacturing companies, such as MTEC, the benefit of economies of scale from substantial order volume.

Supported by a diverse customer base 

  • MTEC’s top ten customers include Kostal, Magna, Beats, Amazon and Roku, based on its FY16 sales, and we expect the customer base to remain largely unchanged in 2Q17F. As mentioned in our 1Q17 results note (see report: Memtech International - Ripe For A Re-Rating) , we see potential for MTEC to leverage on its track record to secure new customers, the likes of Yanfeng Automotive (leading automotive interior component supplier globally), and other headphone manufacturers. 
  • We forecast double-digit sales and earnings growth over FY17-20F for MTEC, partly underpinned by the positive performance and outlook of some of its key customers: 
    • Amazon had its Prime Day sales event on 11 July 2017, which saw record sales for Echo, Fire tablets and Kindle devices. This bodes well for MTEC which develops light guide panels and waterproof housing parts for Ebooks and tablets. 
    • Magna has sales expectations of US$36.0bn-37.7bn and US$43.5bn-46.2bn for FY17 and FY19 respectively (FY16: US$36.5bn), based on its outlook announced in early 2017. As the sole supplier of certain decorative and functional plastic parts to this automotive customer, we expect MTEC to benefit from higher sales orders as Magna seeks to grow its light vehicle production from FY17 target of 39.4m to 40.9m in FY19.
    • Beats still had a 46% market share of the headphone market (in terms of US$ sales) as of Dec 2016, vs. 49% in Dec 2015 despite the launch of Apple’s AirPods on 13 Dec 2016, according to NPD Group’s weekly retail tracking service data.


LAGGARD TECH MANUFACTURING PLAY 


We expect 64% EPS growth in FY17F, led by sales growth and margin improvement 

  • While MTEC’s topline registered a CAGR of 8.6% in FY12-16, we expect the management’s relentless efforts in pursuing new customers (in both automotive and consumer electronics segments) to pay off over the next three years, in the form of double-digit sales growth p.a. 
  • We also anticipate slight gross margin expansion from FY16’s 16.0% to 17.3-17.6% in FY17-19F, as:
    1. the company shifts towards more functional plastics (vs. decorative plastics which command lower margins); and
    2. it increases automation to mitigate cost pressure.
  • Changes in product mix will also affect overall gross margins, in our view. This would support our forecasted FY17F EPS growth of 64% yoy as MTEC recovers from a loss-making 2Q16 due to multiple delays in Beats’ projects. 
  • We also think it is likely to report a yoy and qoq improvement in 2Q17F core earnings, and record a one-off gain of US$3.2m from the completed sale of two land parcels. 
  • 2H is seasonally stronger for the company, due to year end festive holidays which drive up demand for consumer electronics.

Net cash with 3-6% dividend yield 

  • Apart from improving profitability, MTEC also offers a 3-5% FY17-19F dividend yield (pegged to 40% payout ratio), backed by strong operating cashflow and net cash position that makes up c.20% of its market cap. 
  • We think there is potential for special dividends from the sale of land assets (c.US$5.7m net proceeds). 

Reiterate Add with higher TP of S$1.16 

  • While MTEC’s share price has re-rated along with earnings recovery and US technological sector rally, it still trades below the industry average of 12x for FY18 P/E and 1x FY17 P/BV, offering some margin of safety.
  • We previously highlighted MTEC as an attractive M&A target, premised on the following factors:
    1. its technological know-how and qualification for the AU industry,
    2. growing customer base and earnings, as well as
    3. cash-generative business and decent financial strength. 
  • We postulate that in an M&A case, a possible valuation range for the company is S$0.84-S$1.74, based on the acquisition multiples garnered by Fischer Tech in the most recent privatisation offer by a private equity firm.






NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-08-03
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.16 Up 1.090



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