Memtech International - CIMB Research 2017-04-27: Ripe For A Re-Rating

Memtech International - CIMB Research 2017-04-27: Ripe For A Re-Rating MEMTECH INTERNATIONAL LTD BOL.SI

Memtech International - Ripe For A Re-Rating

  • 1Q17 core net profit (US$1.7m) was slightly ahead of our FY17 expected profit of US$8.3m; we project a seasonally-stronger 2H17.
  • We saw robust revenue growth across automotive (+13.4% yoy) and consumer electronics (+23.6% yoy) segments, which contributed c.82% to 1Q17 revenue.
  • FY17-19F EPS CAGR of 32.8%, 4-6% dividend yields. Healthy net cash position.
  • Reiterate Add, with a higher target price of S$1.09 (pegged to 10x FY18F P/E) to reflect higher EPS estimates and P/E multiple target.

1Q17: the best has yet to come 

  • MTEC’s 1Q17 sales of US$36m (+9.8% yoy) accounted for 19% of our full-year forecast, slightly ahead as we expect a seasonally stronger 2H17. 
  • Both automotive (AU) and consumer electronics (CE) segments registered double-digit growth yoy, and continued to be the main drivers for the company. 
  • Thanks to greater volume and economies of scale, 1Q17 gross margin inched up 2.2% pts to 18.1% (1Q16: 15.9%, FY16: 16.0%), lifting core net profit to US$1.7m in 1Q17, vs. US$0.4m a year ago.

Automotive sales not losing steam 

  • AU accounted for c.50% of MTEC’s 1Q17 topline, increasing 13.4% yoy as its major customers (namely Kostal and Magna) continued to build production in China. 
  • MTEC is one of the top 5 suppliers, if not the sole supplier, for the existing parts it produces for these customers. Magna (3rd largest global AU parts supplier) plans to open nine new plants in China, according to news sources. Meanwhile, MTEC was recently qualified by Yanfeng Automotive, the world’s largest automotive interior component supplier.

Beats: a culprit yesterday, a hero today 

  • CE sales grew at a faster pace of 23.6% yoy in 1Q17, led by new and existing Beats projects, as well as high single-digit growth from Netgear and Amazon products; overall, this represented 32% of total 1Q17 topline. 
  • We see potential for MTEC to expand its customer base for its acoustic products, given its track record with Beats. 
  • The telecommunications (TEL) segment continued to face yoy sales decline, but things could turn around in 2H17 with the supplier consolidation initiated by its key TEL customer.

Net cash with 4-6% dividend yield for FY17-19F 

  • MTEC recorded US$5.0m in operating cashflow in 1Q17 (1Q16: US$6.6m) and remains in a healthy net cash position. As we expect FY17 capex expected to stay stable (FY16: US$11m) and c.US$5.7m net proceeds from the sale of two land assets in China, we think management could maintain its 40% payout ratio (dividend policy of at least 30%).
  • This gives us an implied dividend yield of 4-6% over FY17-19F.

FY17-19F assumption changes 

  • 1Q17 gross margin of 18.1% beat our forecasted 16.8% for FY17F, which could improve in tandem with volume growth. 
  • We retain our FY17-19 sales assumptions, but raise our EPS estimates by 8.6-14.3%, on the back of higher margin forecasts (+0.3% pts for FY17-18F and +0.1% pt for FY19F) and lower operating expenses.

Reiterate Add with higher TP of S$1.09 

  • We also now adopt a higher FY18F P/E multiple of 10x (prev. 8x), still at 15% discount to peers’ average of 11.7x to factor in its smaller market cap. 
  • We believe this laggard play in Singapore’s technology manufacturing space is well-positioned to re-rate, supported by its 3-year (FY17-19F) EPS CAGR of 32.8%, attractive dividend yields and strong balance sheet. 
  • Maintain Add with higher TP of S$1.09.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-04-27
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.09 Up 0.760