Memtech International - CIMB Research 2016-12-05: Precisely engineered for a stronger US economy

MEMTECH INTERNATIONAL LTD BOL.SI

Memtech International - Precisely engineered for a stronger US economy

Plastic/rubber parts maker that counts Kostal, Netgear and Apple as its customers.
Automotive and consumer electronics segments are the key growth drivers.
Our Add call with S$0.74 TP is also backed by net cash and 3-6% dividend yield.

Memtech was previously a keypad components supplier to mobile phone brands like Nokia, Motorola and Sony Ericsson, but made a strategic decision to expand into new segments like automotive, consumer electronics and industrial & medical.
It leverages on its core capabilities in silicone rubber/plastic and multiple injection technology to develop tooling, functional and decorative parts for automotive products, keypads, flash lens and silicone rubber consumer electronics products.
The company operates in China, namely Nantong, Kunshan and Dongguan.

Memtech recorded its first net loss of US$1.5m in 2Q16 over the past three-year period, because of persistent delay in Beats’ project.
Pricing pressure, coupled with lower utilisation level, weighed on overall gross margins (2Q16: 8.6%, 2Q15: 17.7%).
The company returned to profitability in 3Q16 upon strong sales recovery and better gross margins (3Q16: 17.7%, 3Q15: 15.4%).
We expect such earnings momentum to carry across FY17-18F as 1) it enters into a seasonally stronger 4Q16, and 2) new projects reach mass production.

We estimate double-digit topline growth in FY17-19F, for Memtech’s core business segments, automotive and consumer electronics. Such growth will come from a mix of new and existing customers, particularly Kostal, Magna, Faurecia and Tesla for the automotive segment, and Netgear, Apple and Roku for the consumer electronics segment.
We also project Memtech’s key customers to be potential beneficiaries of a stronger US economy, and rising spending in these main sectors.
Memtech’s telecommunications segment will continue to face sales decline due to phasing out of certain phone features, while we expect flat sales from its industrial & medical segment.

The stock offers 3-6% forecasted dividend yield, aligned with its newly-implemented dividend policy of at least 30% net profit.
The company has a net cash position of US$24m, which could be further strengthened by marginally improved free cashflow (9M16: US$1.4m, 9M15: US$0.2m). It continues to invest in more plastic injection moulding machines to support future sales growth.

Stronger earnings delivery and more exciting potential projects in the pipeline could catalyse the stock, while key risk is unexpected order cancellation or delay.
We reiterate our Add call with a target price of S$0.74, based on 8x CY18 P/E (Singapore peers’ average of 11x).

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

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