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

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. 

■ 3Q15 revenue grew 2.6% yoy, 11.2% qoq 

  • 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. 

■ Economies of scale and more AU orders to drive margin expansion 

  • 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 core net profit down 4.5% yoy 

  • 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. 

■ Beats by Dre and new automotive projects to come online in FY16 

  • 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. 

■ Rollover to CY17 with higher TP of S$0.20, reiterate Add 

  • 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 | 2015-11-12
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.20 Up 0.17