Memtech International - CIMB Research 2015-11-12: Year-end shopping to drive 4Q

MEMTECH INTERNATIONAL LTD M26.SI

Memtech International - Year-end shopping to drive 4Q

9M15 revenue below our/Bloomberg consensus FY15 forecasts at 68%; 4Q is usually seasonally stronger.
We expect gross margin to improve from 15.7% in 3Q15 on the back of greater AU sales mix and higher order volume going forward.
Excluding exceptional items, 9M15 core net profit was 51% of FY15 numbers.
FY16-17 growth drivers: Beats by Dre and new automotive projects.

Good growth prospects, net cash position, FY15-17F div. yield of 5.2-7.5%. Maintain Add.

Memtech saw a recovery of orders from the automotive (AU) segment in 3Q15, against a decline in telecommunications, which led to 2.6% yoy and 11.2% qoq growth in overall sales.
9M15 revenue formed only 68% of our/consensus full-year estimates, but we expect stronger consumer electronic (CE) sales in 4Q due to the year-end festive season, driven by customers like Amazon and Netgear.

3Q15 gross margin remained stable at 15.7% (3Q14: 15.5%), but was lower than 1H15’s gross margin of 17.7% due to higher sales mix of consumer electronics.
3Q15’s estimated segmental breakdown is AU(40%), telecommunications (22%), CE(27%) and others (11%). We expect margins to improve further as AU sales contribution increases and greater order volume to generate economies of scale.

9M15 operating costs grew 4.4% yoy as a result of higher staff expenses.
Excluding the one-time gain from the liquidation of a subsidiary in 9M14 and FX gains in 9M15 (50% revenue in US$ vs operating expenses in Rmb), 9M15 core net profit fell 4.5% yoy, accounting for 51%/53% of our/consensus full-year numbers.

In addition to order resumption from the AU segment, management also shared about new project wins from both Continental and Tesla, which are expected to contribute meaningfully to FY16-17 earnings if things go according to plans.
Production for Beats’ new product is targeted for 1Q16.

We have taken into consideration the earlier AU order delay and new projects ahead in FY16, and have revised our assumptions. Hence our FY15-17F EPS decrease by 5.5%/3.0%/8.2%, respectively.
As we roll forward to CY17, our target price rises to S$0.20, based on CY17F P/E of 10x (in line with peers’ average).
We maintain our Add rating and continue to like Memtech for its growth prospects, net cash position and FY15-17 indicative dividend yield of 5.2-7.5%.

Jessalynn CHEN CIMB Securities | Kenneth NG CFA CIMB Securities | http://research.itradecimb.com/ 2015-11-12

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.20 Up 0.17