Memtech International (MTEC SP) - UOB Kay Hian 2017-08-11: 2Q17 Results In Line; Hoping For A Bigger Payout At The End Of The Year

Memtech International (MTEC SP) - UOB Kay Hian 2017-08-11: 2Q17 Results In Line; Hoping For A Bigger Payout At The End Of The Year MEMTECH INTERNATIONAL LTD BOL.SI

Memtech International (MTEC SP) - 2Q17 Results In Line; Hoping For A Bigger Payout At The End Of The Year

  • Memtech International (Memtech) reported in-line 2Q17 results and turned around from a loss of US$1.4m in 2Q16 to an attributable core net profit of US$1.7m, driven by stronger gross margins and a 20% increase in revenue. 
  • The group’s balance sheet remains very robust with it in a net cash position of US$26.8m (24% of market capitalisation). 
  • Expect a seasonal ramp-up in performance in 2H17 as the holiday season approaches.
  • Maintain BUY with a higher PE-based target price of S$1.18.



RESULTS

  • Memtech International (Memtech) reported 2Q17 results which were in line with our estimates. 
  • Core net profit came in at US$1.7m for 2Q17 vs a loss of US$1.4m in 2Q16. 
  • The group’s revenue rose by 20% yoy from US$31.4m in 2Q16 to US$37.8m in 2Q17 - driven by higher sales in the consumer electronics segment. 
  • Consumer electronics sales rose from 29.7% of total sales in 2Q16 to 37.0% in 2Q17. 
  • Gross margin trended upwards from 8.6% in 2Q16 to 17.3% in 2Q17 due to higher operating leverage.

Balance sheet remains strong. 

  • Memtech booked an exceptional gain of US$3.2m in 2Q17 from the sale of two plots of land in Huzhou, China to Zhejiang Auto-Parts Co Ltd. This further bolstered the balance sheet of the company as Memtech’s net cash position rose from US$22.8m in 2Q16 to US$26.8m in 2Q17 or about 24% of its current market capitalisation.

Cautiously optimistic towards the rest of the year. 

  • Memtech will continue to seek and strengthen business relationships with key customers and pursue new opportunities within the automotive and consumer electronics segments. 
  • The group is cautiously optimistic about its performance for the rest of 2017.


STOCK IMPACT


Expect a seasonal ramp-up in 2H17. 

  • Memtech’s 2H tends to be seasonally strong for the company as the consumer electronics segment picks up in preparation for the holiday season. In 2H16, Memtech recorded a core net profit of about US$7.1m. 
  • Memtech’s first half tends to be problematic for the group due to lower contribution from consumer electronics segment. However, this year’s performance met our expectations and cemented our investment thesis that earnings momentum is likely to continue into 2017.

Potentially higher dividends at the year end.

  • Given Memtech’s strong balance sheet, exceptional one-off gains from the sale of land in China and its consistent dividend track record, we expect the company is likely to pay out a dividend of at least 3.5 S cents/share which will translate into a yield of 3.4% for 2017.


EARNINGS REVISION/RISK

  • We have raised our 2017-19 core net profit estimates by 5.3-9.6% as we fine-tune and lower our sales and marketing and general expenses assumptions.


VALUATION/RECOMMENDATION

  • Maintain BUY on the company with a higher PE-based target price of S$1.18 as we roll over our estimates and peg our valuation to peers’ average 2018F PE of 10.3x. 
  • Our target price implies a historical P/B ratio of 1.1x based on Memtech’s book value as at 30 Jun 17. 
  • We re-iterate our view that should a privatisation happen, we would likely see further upside to our target price as the most recent acquisition of Fisher Tech was done at 1.5x trailing P/B.


SHARE PRICE CATALYST

  • Potential privatisation.
  • Expansion into new precision engineering segments.
  • Potential dividend surprises




Nicholas Leow UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-11
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.18 Up 1.150



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