CEI Limited - CIMB Research 2016-12-05: 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.
Maintain Add with P/E-derived (9.2x, 10-year average) target price of S$1.04.

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.

CEI Limited’s average annual revenue over FY01-05 was S$54.0m (US$40m). Over FY06-10, average annual revenue was S$85m (US$63m). Ten 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 its gross profit margin by 0.5% pts, assuming CEI Limited gets to retain all the benefits.

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.

We expect CEI Limited’s medtech and life science business to drive revenue growth of 5% over the FY17-18 forecast period. Assuming that gross margins can be stablised at 24-25%, core earnings growth over FY17-18F will average 10.2%.
Taking into consideration the muted earnings growth and minimal capex, the company’s dividend track record could see investors being rewarded with 10-12% 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 have an Add with a target price of S$1.04.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-12-05

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