Memtech International - CIMB Research 2017-02-24: Poised for more customer wins

Memtech International - CIMB Research 2017-02-24: Poised for more customer wins MEMTECH INTERNATIONAL LTD BOL.SI

Memtech International - Poised for more customer wins

  • MTEC's  FY16 gross margin contracted 1.5%pts as a result of Beats’ project delay, offsetting sales growth of 12%. FY16 core PATMI fell 23% yoy, still above our expectations.
  • Sustainable double-digit sales growth in AU and CE, backed by consistent project wins and new potential top-tier customers.
  • Net cash company with a 5.3-7.5% forecast dividend yields for FY17-19F.
  • Maintain Add with a higher TP of S$0.76 (8x FY18 P/E).

FY16 core PATMI above expectations 

  • MTEC reported a FY16 core PATMI of US$5.5m (excluding FX gain of US$0.8m), which formed 108% of our full-year number. 
  • 4Q16 gross margin remained stable at 19% vs. a year ago, but Beats’ project delay in 1H16 dragged down overall FY16 gross margin to 16.0%, from FY15’s 17.5%. This, coupled with higher sales & marketing expenses, resulted in a 23% yoy decline in FY16 core PATMI. 

Twin growth engines in automotive and consumer electronics 

  • FY16’s topline grew 12% yoy to US$159m, thanks to robust double-digit growth in both the automotive (AU) and consumer electronics (CE) segments, which contributed to almost 80% of total sales. 
  • Over the next few years, management expects AU and CE to remain as its core growth drivers, as MTEC was recently qualified by Yanfeng Automotive (the world’s largest automotive interior component supplier), and could also gain new customers for acoustic products given its track record with Beats.

Potential recovery in telecommunications 

  • We also sense management optimism across other segments including telecommunications (TEL), which may see the reversal of more than 2 years of sales declines. The company is a potential beneficiary of supplier consolidation by its biggest TEL customer.

5.3-7.5% dividend yield; saving cash for future capex needs 

  • MTEC’s operating cashflow strengthened from US$8.6m in FY15 to US$14.4m in FY16, slightly offset by higher capex needs of US$11.3m (FY15: US$7.6m). This is mostly attributed to the construction of new factory extension and Beats’ projects. 
  • Management declared a lower DPS of 2.5Scts (vs 3.3Scts in FY15), in view of more intensive capital needs for potential projects in the pipeline. This gives us an implied 4% dividend yield and 47% payout ratio. 
  • The company continues to be in a net cash position.

Maintain Add with higher TP of S$0.76 

  • We raise our FY17-18F sales assumptions but adopt lower margins, and introduce our FY19F numbers. Hence our FY17F EPS estimate remains unchanged while our FY18F EPS estimate increases by 2.5%. 
  • Our target price is now higher at S$0.76, pegged to 8x CY18 P/E (at a discount to Singapore peers’ average of 11.3x to factor in its smaller market cap). 
  • Reiterate Add. 
  • Catalysts include stronger earnings delivery, while key risk is unexpected order cancellation or delay.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-02-24
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.760 Up 0.740