Memtech International - OCBC Investment 2016-02-29: FY16 forecasts revised upwards; maintain HOLD

MEMTECH INTERNATIONAL LTD M26.SI

Memtech International: FY16 forecasts revised upwards; maintain HOLD

Revenue came in at US$142.2m, in line with our forecast of US$144.1m.
Core earnings came to US$6.9m, after adjusting for a one-off US$1.2m write back of allowance for doubtful receivables; this was 12% higher than our forecast of US$6.2m.
We attribute this to a stronger-than-expected jump in automotive revenue (25.0% vs. our 18.5%), and a gentler decline in Telecom revenue (-20.3% vs. our -26.5%).
Consumer Electronics did not increase as much as our forecast (2.6% vs. 18.4%), partly due to weak Kindle sales in 4Q15.
The full-year dividend also surpassed expectations at 3.3 S-cents to our 3.0 S-cents forecast.

The components it supplies for two of its largest customers in the CE space – Amazon and Netgear – have posted decent FY15 results and an optimistic industry outlook (see Appendix).
While we continue to be concerned with Kindle sales going in 2016, Memtech’s CE segment should benefit from its first order with Beats by Dr. Dre this upcoming year.

Memtech is the only supplier of US$30 to US$40 worth of components per car to Tesla, for all of Tesla’s models.
Based on Tesla’s 2016 delivery guidance of 187K to 197K units of Model S and X, we calculate a potential US$5.6m to US$7.9m of additional revenue for Memtech in FY16.
Nonetheless, we note that Tesla missed its delivery guidance in 2014 and hit the low end of its guidance in 2015.
Elon Musk recently announced that its lower-end, US$35K Model 3 will start taking pre-orders in Mar 2016, though car production will not start till early 2017. As such, we expect a larger contribution from Tesla starting 1H17.

Given the reassuring write-back in allowance for doubtful receivables as well as continued progress of orders with Dr. Dre and Tesla, we adjust our FY16 forecasts upwards by 0.1% to US$156.1m of revenue and by 15.8% to US$8.1m of net profit.
We apply our FY16 forecast of 7.98 S-cents in net earnings to an updated fair value PE ratio of 9.1x to arrive at a fair value of S$0.725.
Our forecasted dividend payout for FY16 is 3.6 Scents, giving a dividend yield of 6.1%.
Maintain HOLD at a fair value of S$0.725.

Deborah Ong OCBC Securities | http://www.ocbcresearch.com/ 2016-02-29

OCBC Securities SGX Stock Analyst Report HOLD Maintain HOLD 0.725 Same 0.725