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).

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.

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.

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.

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.

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.

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