CEI Limited - CIMB Research 2016-09-07: A new run rate?

CEI Limited - CIMB Research 2016-09-07: A new run rate? CEI CONTRACT MANUFACTURING LTD AVV.SI

CEI Limited - A new run rate?

  • Niche contract manufacturer focusing on low volume, high mix manufacturing; derives ~50% of revenue from the medtech/life science sector.
  • Proxy for the growing medtech/life science industry.
  • Gross margins assumed to be stabilised in the 24-25% range.
  • Projected dividend yields of 11.0-13.0% over FY16-18.
  • Potential re-rating catalysts in new customer wins or involvement with other products with existing customers.

Initiating coverage at Add 

  • We expect CEI Limited’s medtech and life science business to drive revenue growth of 5% over FY17-18 forecast period. Assuming that gross margins can be stablised within 24- 25%, core earnings growth over FY17-18 will average 10.2%. 
  • Despite the muted earnings growth, minimal capex and a dividend track record could see investors being rewarded with 11-13% dividend yields over the next three years if our forecasts pan out. 
  • Based on its 10-year historical average P/E of 9.2x, we initiate coverage at Add with a target price of S$1.04.

Medtech and Life Science proxy 

  • CEI Limited derives ~50% of its sales from the medtech/life science sector; its customers’ products are used for chromatographs, analysers and atomic absorption.
  • These products are typically deployed in the fields of drug discovery, materials research, food safety control, forensics and others. Many of CEI Limited’s key customers have been with the company for ~10-20 years.

A new run rate? 

  • CEI Limited’s average revenue over FY01-05 was S$54.0m (US$40m). Over FY06-10, average revenue was S$85m (US$63m). 
  • 10 years after listing, its revenue crossed the S$100m mark in FY11, and expanded 10.6% yoy in FY14 and 9.1% in FY15. Better traction with its customers and the stronger US$ versus the S$ also helped revenue growth, as close to 100% of its sales are denominated in US$. 
  • Going forward, we believe this could well be the new revenue run rate for the company.


  • The key business risk is order push-back by customers due to global economic conditions. The other major risk would be US$ strength versus S$, Vietnamese dong and Indonesian rupiah. 
  • Sales are almost entirely denominated in US$, while ~87% of its purchases are denominated in US$ and other foreign currencies. We estimate that a 5% appreciation of the US$ against the S$ could improve gross profit margin by 0.5% pts, assuming CEI Limited gets to retain all the benefits.

Re-rating catalysts 

  • Potential re-rating catalysts include: 
    1. better-than-expected earnings (CEI Limited reports on a half-yearly basis); 
    2. winning more orders for its box-build business with medtech/life science customers; and 
    3. clinching new medtech/life science customers.
  • Given its fragmented shareholding structure and strong cash generation capability, we opine that the company is likely to be receptive to discussions from private equity firms who may have a fit for CEI Limited in their portfolio.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-09-07
CIMB Research SGX Stock Analyst Report ADD Initiate ADD 1.04 Same 1.04