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

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.

Transformation complete; technology remains in plastic injection 

  • 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.

Time to move on from temporary setback in 2Q16

  • 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.

Automotive and consumer electronics to propel sales

  • 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.

Net cash, 3-6% dividend yield, positive FCF 

  • 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.

Maintain Add; catalyst to come from results outperformance

  • 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
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.740 Same 0.740