Memtech International - CIMB Research 2016-11-11: Strong rebound from loss-making 2Q16

Memtech International - CIMB Research 2016-11-11: Strong rebound from loss-making 2Q16 MEMTECH INTERNATIONAL LTD BOL.SI

Memtech International - Strong rebound from loss-making 2Q16

  • 9M16 core net profit of US$2.3m was ahead of Bloomberg consensus but deemed in line with our expectations at 39% as we forecast a stronger 4Q16.
  • 3Q16 sales growth (+25% yoy, +48% qoq) driven by both CE (Apple, Ruko) and AU segments.
  • 3Q16 gross margin improved to 17.7% from 2Q16’s 8.6% (3Q15: 15.4%).
  • The stock offers 3.6-6.7% dividend yield, backed by strong operating cashflow.
  • Reiterate Add with higher TP of S$0.74 as we roll over to end CY18 (8x P/E).

Resumption of Beats project boosted 3Q16 

  • MTEC reported positive 3Q16 results as there was strong sales recovery (+25% yoy, +48% qoq), stemming from both consumer electronics (CE) and automotive (AU), which contributed 40% and 37% respectively to overall topline. Sales from telecommunications (TEL) continued to slide while industrial & medical segment stayed stable, in line with our expectations. 
  • As a result of higher production volume, we saw gross margin expansion from 2Q16’s 8.6% to 3Q16’s 17.7%, even better than 3Q15’s 15.4%.

Sustainable earnings momentum 

  • At current run-rate, we believe MTEC is on track to achieve our forecasted FY16 net profit. The seasonality effect of CE demand (particularly from Amazon) is more apparent in 4Q16, during which a 2nd Beats project was also launched. As these new projects enter mass production, we estimate mid-teens sales growth from FY17-18F and better margins. 
  • The higher inventory level of US$19m at end Sep-16 is a possible indication of more order completion in the coming quarters.

Strong operating cashflow, net cash to support dividends 

  • MTEC continues to generate strong operating cashflow of US$10.3m in 9M16 (9M15: US$6.9m), only slightly offset by higher capex of US$8.9m (9M15: US$6.7m), invested in more plastic injection moulding machines. 
  • We believe our FY16-18F forecasted dividend yield of 3.6-6.7% can be supported by its net cash of US$24m as of end Sep- 16. 
  • We are also not overly concerned with the higher marketing expenses (in line with sales growth), and effective tax rate (which should normalise on full-year basis).

No change to estimates, maintain Add with higher target price 

  • We keep our FY16-18F earnings estimates unchanged, but our target price rises from S$0.64 to S$0.74 as we roll over to end-FY18, still pegged to 8x CY18 P/E (27% discount to Singapore-listed peers’ average of 11x). 
  • Strong earnings delivery could catalyse the stock, while the key downside risk to our Add call is unexpected order delay.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | 2016-11-11
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.74 Up 0.640