Memtech International - OCBC Investment 2015-12-11: Buoyed by new order growth and ramp-ups

SGinvestors.io

MEMTECH INTERNATIONAL LTD M26.SI 

Memtech International: Buoyed by new order growth and ramp-ups 

 New order extensions in the pipeline
 Limited reliance on industry outlook
 Risk of order pushbacks counterbalanced

New entrant in the automotive and consumer electronics space 

• As Memtech demonstrates its engineering capabilities and reliability as a plastic parts manufacturer in the automotive and consumer electronics space, we expect revenue growth to be resilient to the industry outlook at this point in time, relative to more mature Tier 2 suppliers. 
• For the upcoming year, we identify three key sources of revenue growth: 
  1.  the ramp-up of existing orders in the automotive space; 
  2.  new orders from existing customers; and 
  3.  new orders from new customers. 
• We forecast revenue to increase 4.8% in FY15, 10.8% in FY16, and 0.7% in FY17. 

Baseline growth supported by exposure to variety of end-markets 

• Given our neutral outlook for the tech sector, Memtech provides the benefit of having a relatively diversified operating model. For instance, discounting the topline growth potential from new orders, we note the risk of order delays in the CE segment from customers such as Amazon (Kindle). 
• Notwithstanding a global economic downturn, the downside risk of such potential pushbacks should be limited by the healthy industry prospects in the automotive segment. 

Supported by longer-term improvements in gross and operating margins 

• Over the next three years, we expect the gradual shift in product mix from decorative (~17% GP margin) to high-precision functional components (~20-24% GP) in the automotive segment to contribute to a higher gross margin. 
• In addition, ongoing automation investments are expected to increase productivity and keep a cap on wage pressures faced in its Chinese production plants. 
• Gross margins are forecasted to be 17.1% in FY15, 17.3% in FY16, and 18.3% in FY17. 

High dividend yield and potential value accretion 

• Based on a forecasted dividend yield of 5.7% and projected earnings growth, we maintain our BUY rating with a fair value of S$0.158 for an expected total return of 25.4%.

Deborah Ong OCBC Securities | http://www.ocbcresearch.com/ 2015-11-25

OCBC Securities SGX Stock Analyst Report BUY Initiate BUY 0.158 Same 0.158