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Memtech International - CIMB Research 2016-02-29: Benefiting from enlarged customer base

Memtech International - CIMB Research 2016-02-29: Benefiting from enlarged customer base MEMTECH INTERNATIONAL LTD M26.SI 

Memtech International - Benefiting from enlarged customer base 

  • FY15 core net profit rose 12.2% yoy and was in line with our forecast at 105%. 
  • We think rising orders from new and existing customers in automotive (AU) and consumer electronics (CE) will be catalysts and drive FY16-18 sales growth. 
  • Expect stable sales yoy in the industrial & medical segment to offset declining telecommunications (TEL) sales in FY16. 
  • Focus on better sales mix and increasing automation will support sustainable profit growth ahead, in our view. 
  • Retain Add with S$0.94 target price, now pegged at 9x FY17 P/E (industry average). 


■ Stronger AU sales growth offsets declining TEL 

  • MTEC reported strong 4Q sales of US$38.2m (+0.8% yoy and 3.0% qoq). FY15 revenue rose 3.4% yoy, driven by 25% yoy increase in AU segment sales, but offset by 20.3% fall in TEL sales. 
  • The CE segmented recorded slight sales growth of 1.4% in FY15, while industrial & medical sales rose 13.9% yoy. 

■ FY15 gross margin was stable at 17.5% 

  • On the cost side, MTEC saw greater sales and marketing expenses (+5.3% yoy) due to new products, while general and administration expenses dropped 6.2% from US$11.5m in FY14 to US$10.7m in FY15 as a result of a one-off US$1.2m writeback for doubtful receivables. 
  • We see scope for margin improvement, as management seeks to increase automation and reduce headcount (currently: 4,200 workers). 
  • Excluding non-recurring items, FY15 core net profit increased 12.2% yoy. 

■ Key sales driver #1: new orders from AU customers 

  • Apart from a recent contract win from Faurecia (leading tier-1 auto parts supplier), MTEC has a strong AU customer base, including Tesla Motors, Kostal (biggest customer) and Magna. 
  • MTEC supplies plastic parts worth US$30-40/car across all three marques. 
  • Tesla’s expected delivery of 80k-90k units of Model S and Model X vehicles in 2016, as well as the projected launch of Model 3 in 2017, could drive up FY16-17 sales. 

■ Key sales driver #2: Beats by Dr.Dre 

  • Production for Beats’ new headphone products commenced in 1Q16, with two potential new products that could contribute to high double-digit CE sales growth in FY16 (FY15: US$39.2m), if all goes according to plan. 
  • Revenues from other CE customers like Amazon and NetGear are expected to remain stable in FY16. 

■ Mixed outlook for TEL, industrial & medical 

  • TEL’s FY15 sales decreased 20.3% yoy and management expects this downward trend to continue as feature phones manufactured by MTEC are phased out. 
  • The industrial & medical segment, on the other hand, is likely to record stable sales in FY16. 

■ Reiterate Add 

  • After we adjusted our sales and tax rate assumptions (to account for ongoing tax allowances), our FY16-17 EPS forecasts went up by 4.4-6.2%. 
  • We maintain our Add rating with target price of S$0.94, based on CY17 P/E of 9x (industry average, previously 10x). Key risk is delay in customers’ orders. 



William TNG CFA CIMB Securities | NGOH Yi Sin CIMB Securities | http://research.itradecimb.com/ 2016-02-29
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.94 Down 1.00


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