Trek 2000 - RHB Invest 2015-11-09: Gone Off Trek

Trek 2000 - RHB Invest 2015-11-09: Gone Off Trek TREK 2000 INT'L LTD 5AB.SI 

Trek 2000 (TREK SP) - Gone Off Trek 

  • Disappointing 3Q15 results despite robust 23.8% YoY topline growth – NPAT fell 27.6% YoY, mainly on a 94.8% rise in R&D costs to USD1.8m and a USD600,000 loss from a subsidiary. 
  • Downgrade to NEUTRAL with a SGD0.31 TP (from SGD0.52, 3% downside) as we cut FY15F/FY16F NPAT by 40%/38% to factor in higher R&D costs. 
  • Together with OSIM, Trek is trying to advance into the medical technology segment. 

 Dragged down by higher research & development (R&D) costs. 

  • Trek 2000 International’s (Trek) 3Q15 results were a letdown, mainly due to a 94.8% rise in R&D costs to USD1.8m. Coupled with a USD600,000 loss from subsidiary Racer Group, this caused 3Q15 NPAT to decline by 27.6% to USD550,000 despite revenue surging 23.8% YoY to USD44m. 
  • The revenue surge was mainly due to a 25% YoY increase in Trek’s interactive consumer solutions segment, which consists of the sales of its Flucard and Wifi memory modules. 
  • In addition, GPM increased slightly to 8.7% (from 8.5%). 

 R&D initiatives in the medical technology segment. 

  • Back in June, Trek gained OSIM International (OSIM) (OSIM SP, NEUTRAL, TP: SGD1.50) as a strategic partner in the medical technology segment. OSIM invested a SGD10m equity stake in the company to fund its ongoing R&D expenses. 
  • To date, an increase in R&D initiatives has resulted in the filing of three new patents and further developments in the medical technology segment. This increases the groups portfolio of 436 patents granted worldwide. 

 Downgrade to NEUTRAL with a SGD0.31 TP. 

  • Trek’s FY15 has been fairly disappointing. It has simply gone off track partially due to lower margins from the group’s interactive consumer solutions business segment as well as higher R&D expenses. 
  • Going forward, it is likely for such high R&D expenses to continue as the company is currently collaborating with partners on the development and commercialisation of various products within varied spaces. 
  • In addition, Trek has also not announced any new contract wins or continued orders from Rely/Mattel China or other customers to date. 
  • As a result, we have lowered our FY15 and FY16 NPAT estimates by 40% and 38% respectively and downgraded our call to NEUTRAL from Buy with a lower of SGD0.31 TP (from SGD0.52), based on 20x FY15F P/E.

Jarick Seet RHB Securities | http://www.rhbinvest.com/ 2015-11-09
RHB Securities SGX Stock Analyst Report NEUTRAL Downgrade BUY 0.31 Down 0.52