Memtech International - CIMB Research 2016-05-03: Delayed by Beats; expect stronger 2H16

MEMTECH INTERNATIONAL LTD M26.SI

Memtech International - Delayed by Beats; expect stronger 2H16

MTEC reported 1Q16 sales and core net profit below our/consensus FY16 estimates at 21% and 6%/7%, respectively. We expect a stronger 2H16.
The main culprit was production delay for the Beats headband.
Post 1Q16, we could see a sales recovery but lower gross margins, which leads to our 8.6-8.7% cut in FY16-17F EPS.

We maintain our Add recommendation, with a lower TP of S$0.86 based on a CY17F P/E of 9x. The stock still offers attractive FY16-18F dividend yields of 4.5-6%.

1Q16 sales of US$33.2m was slightly below our FY16 forecast, primarily due to a delay for the Beats headband project, which led to zero sales contribution in 1Q16; however, production did commence in 2Q16.
1Q16 gross margin also suffered from increased price competition and a lack of economies of scale, falling to 15.9%, vs 17.7% in 1Q15.
Consequently, 1Q16 net profit fell 53% to US$0.6m, which formed only 6% of our fullyear forecast.

We expect MTEC’s major AU customers such as Kostal and Magna to contribute stable sales, with sales growth to come from Tesla and other smaller AU customers such as Continental and its newly acquired customer, Faurecia, as they ramp up in volume.
All in all, we forecast FY16-18 top-line growth of 20% for the AU segment.

Apart from the existing Beats headband project, there could be two more Beats projects in the pipeline on a different headset component in 2H16.
Another sales engine for consumer electronics (CE) could be the set-top box by Roku, with an estimated 35-40% growth in FY16.
More notably, MTEC’s key CE customer, Amazon, reported a 28% jump in its 1Q16 revenue, helped by higher sales of both the Kindle and Fire tablet. Its latest product, Amazon Kindle Oasis, could translate into greater orders for MTEC.

As a result of the Beats project delay, we adjust downwards our FY16-17 sales growth forecast.
We also lower our CE margin assumptions, as Apple (owner of Beats Electronics) had demanded cost reduction from all its suppliers that led to a decrease in selling price for the headband. Therefore, our FY16-17 EPS projections have dropped by 8.6-8.7%.

Despite the blip in CE sales, we think the earnings outlook for MTEC remains positive (3-year forward EPS CAGR of 13.8%).
We maintain our Add call with target price of S$0.86 based on a CY17F P/E of 9x (industry average).
MTEC remains in a net cash position, with improved free cash flow of US$3.6m (1Q15: US$2.3m) due to better working capital management.
The stock’s dividend yield is attractive at an average 5.3% for FY16-18F.
The key risk, in our view, is further order push-back.

William TNG CFA CIMB Securities | NGOH Yi Sin CIMB Securities | http://research.itradecimb.com/ 2016-05-03

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.86 Down 0.94