Memtech International - CIMB Research 2016-08-12: Temporary hiccup in 2Q16

Memtech International  - CIMB Research 2016-08-12: Temporary hiccup in 2Q16 MEMTECH INTERNATIONAL LTD BOL.SI

Memtech International - Temporary hiccup in 2Q16

  • 2Q16 core net loss of US$1.5m in line with earlier profit warning.
  • Slower sales for TEL products, order pushback for major CE customer, and higher costs contributed to the loss in 2Q16. We expect stronger 2H16.
  • We lower our FY16-18 sales assumptions and EBIT margins for telecommunications and consumer electronics, resulting in EPS cuts of 12-37%.
  • We maintain Add, with a lower target price of S$0.64 (pegged to 8x FY17 PE, previously 9x). The stock offers FY16-18F dividend yield of 3.4-6.4%.

Beaten down by Beats’ project delay 

  • MTEC reported 1H16 sales decline of 3.7% yoy to US$64.4m, below our/consensus fullyear numbers at 42%/43% respectively. We saw double-digit revenue drop across telecommunications (TEL) and industrial & medical segments, slightly mitigated by c.5% yoy sales growth in automotive (AU) and consumer electronics (CE) segments in 2Q16.
  • The key miss is attributed to 
    1. Beats’ projects delay (of which two have resumed) and 
    2. lower demand for TEL (recall that Kyocera was key customer with c.US$6m in FY15).

2Q16: worst quarter but things should get better 

  • Due to lack of economies of scale from delayed orders, and costs incurred for tooling work for new orders/customers, MTEC suffered lower gross margins of 8.6% in 2Q16 (1H15: 17.7%, 1H16: 12.4%). 
  • Other opex stayed relatively flat despite lower revenue, leading to 1H16 core net loss of US$1.1m (our FY16F net profit: US$8.1m), down from 1H15’s net profit of US$2.3m. 
  • With CE order resumption gaining stronger momentum, we expect a stronger 2H16 supported by rising topline and improving margins.

Looking ahead to FY17 

  • AU and CE will continue to be key growth drivers for MTEC, to offset weakening sales from TEL and industrial & medical, according to management. 
  • Apart from ramping up production in Beats’ products, MTEC also sees slight growth in Roku, while sales for Amazon and Netgear should remain stable in FY16. AU production is forecasted to gain stronger momentum in 2H16 till FY17. 
  • As we trim our FY16-18 sales assumptions and segmental margins, our EPS estimates fall 12-37%.

Maintain Add rating with lower target price of S$0.64 

  • Based on an assumed dividend payout of 40%, MTEC’s FY16-18F dividend yield is 3.4- 6.4%. Share price has reacted negatively to 2Q16’s net loss, but we see longer-term value in MTEC’s engineering expertise and new client wins. 
  • Maintain Add with a lower target price of S$0.64, now pegged to 8x FY17 P/E (previously 9x) as we take a greater discount to Singapore-listed peers’ average of 10.4x. 
  • Key downside risk is further order pushback.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | 2016-08-12
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.64 Down 0.860