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

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 

  • Strong set of results in FY15 
  • Orders from Beats and Tesla 
  • FY16 earnings forecast revised upwards 

FY15 earnings surprise on the upside 

  • 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. 

Consumer Electronics: Amazon and Netgear to form strong core base; upside from Dr. Dre contribution 

  • 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. 

Automotive: Tesla contribution to boost automotive segment results 

  • 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. 

FY16 earnings forecast revised upwards 

  • 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 | 2016-02-29
OCBC Securities SGX Stock Analyst Report HOLD Maintain HOLD 0.725 Same 0.725