Memtech Intl - OCBC Investment 2016-08-08: PROFIT WARNING FOR 2Q16; LOWERED FV

Memtech Intl - OCBC Investment 2016-08-08: PROFIT WARNING FOR 2Q16; LOWERED FV MEMTECH INTERNATIONAL LTD BOL.SI

Memtech Intl - PROFIT WARNING FOR 2Q16; LOWERED FV

  • Prelim. adjust. made before 2Q results. 
  • Possibly secular drop in telco segment. 
  • Fair value drops to S$0.50. 



Profit warning issued 

  • Memtech announced after-market on 27 July that it expects to report a net loss for 2Q16 mainly due to lower demand for the group’s telecommunication (telco) products and higher costs. The delay in the fulfillment of a major order at the customer’s request was also a contributing factor. 
  • We suspect that the decline in telco revenue could be linked to Kyocera, a major customer for Memtech’s telco segment, given continued losses in its telecommunications equipment group (2Q16: JPY 5.5b loss). 
  • We believe the decrease in contribution from the telco segment to be largely secular, in line with the group’s efforts to move out of the sector.


Reduced growth and margin assumptions 

  • We had previously projected a 2Q16 net profit of S$0.65m, which included an assumption of a 13% YoY drop in telecommunication revenue. Given the lack of information regarding the magnitude of the 2Q loss and the situation going forward, we make preliminary adjustments to our fair value on what was announced. 
  • We reduce our telco growth assumptions for 2Q16 from -13% YoY to -25% YoY. 
  • In addition, we decrease our FY16 gross margin from 16.9% to 14.7% while our FY17 gross margin assumption stays flat at 17.6%. For comparison, the FY15 gross profit margin was 17.5%.


Lowered FY16 PATMI forecasts 

  • We reduce our FY16 PATMI forecast from S$6.2m to S$2.8m, with only 2Q having a quarterly loss of ~S$0.1m. 3Q16 and 4Q16 are forecasted to clock in a PATMI of ~S$0.7m and ~$1.6m respectively. 
  • Given the lack of clarity on the earnings outlook going forward before the 2Q release, we apply the same PE multiple of 11.1x to our blended FY16/FY17 forecasts. Our fair value consequently drops from S$0.68 to S$0.50. 
  • Memtech will be releasing its results on 11 Aug after trading hours. Please note that for counters of market cap below S$150m, the HOLD rating indicates total expected returns within a +/-30% range
  • We maintain HOLD with a fair value of S$0.50.




Deborah Ong OCBC Investment | http://www.ocbcresearch.com/ 2016-08-08
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 0.50 Down 0.680


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