Memtech International - CIMB Research 2017-07-04: All Stars Aligned

Memtech International - CIMB Research 2017-07-04: All Stars Aligned MEMTECH INTERNATIONAL LTD BOL.SI

Memtech International - All Stars Aligned

  • Memtech International (MTEC) is a precision engineering firm known for its liquid silicone rubber (LSR) and multiple injection capabilities.
  • We believe its earnings trajectory in FY17-19F will be driven by higher AU and CE sales orders and better margins.
  • MTEC could be an attractive M&A target, with its strong balance sheet, earnings profile and established customer base, in our view.
  • Other potential catalysts include new customer wins and special dividends.
  • At 8.2x FY18F P/E and 0.74x P/BV, MTEC remains one of the cheaper tech plays in Singapore, with 32.8% 3-year EPS CAGR and 4-6% dividend yields in FY17-19F.

Laggard tech manufacturing play 

  • As a precision engineering company, MTEC prides itself on its core competencies in LSR and multiple injection technology, which have successfully led its transformation from a pure keypad components manufacturer into an established supplier for both the automotive (AU) and consumer electronics (CE) industries today. 
  • It counts many tier-1 AU companies (such as Kostal, Magna and Faurecia) as well as leading CE brands (Beats, Amazon) as its major customers.

+45% ytd, but ripe for valuation re-rating 

  • MTEC has historically traded at a steep discount to its peers’ average as a result of its smaller market cap, trading illiquidity and patchy earnings record. 
  • We think the stock deserves a re-rating due to: 
    1. its robust earnings growth, and 
    2. net cash/share of 24.6 Scts at end-1Q17 (representing c.27% of market cap) that may be better utilised for higher dividends or synergistic M&A opportunities.

Still an Add rating 

  • We reiterate Add on MTEC with unchanged FY17-19F forecasts and target price of S$1.09, still pegged to 10x FY18F P/E (at 10% discount to peer average). 
  • Downside risks to our Add call include unexpected project delays or cancellation.

Share price driver #1: Earnings growth accelerating 

  • MTEC’s 1Q17 core net profit of US$1.7m was an improvement over the US$0.4m in 1Q16, driven by double-digit sales growth in both AU and CE segments. 1Q17 gross margin of 18.1% benefited from greater volume and economies of scale, up from 1Q16’s 15.9%. 
  • We project earnings growth of 22-56% p.a. over FY17-19F, underpinned by increasing orders from existing customers and margin expansion. 
  • We note that 2H is seasonally stronger and our forecasts have yet to factor in potential new customer wins.

Share price driver #2: Potential special dividends 

  • We forecast FY17-19F dividend yields of 4-6% for MTEC, based on its dividend policy of not less than 30% of net profit. 
  • Memtech has consistently paid dividends, even during its loss-making years of FY12-13. 
  • Backed by recent net proceeds of c.US$5.7m from the sale of two land assets in China and a healthy net cash position of US$28m as at end-1Q17 to meet its annual estimated capex requirement of US$10m-12m, we believe a special dividend could be on the cards for FY17F to reward shareholders.

Share price driver #3: M&As? 

  • We think MTEC now looks attractive as an M&A target given its cash-generative business, growing customer base and the fact that earnings are possibly at an inflection point. 
  • Competitors keen to break into the automotive and Beats supply chain but deterred by the high entry barriers (long audit process and strict technical know-how) could instead seek a faster way by acquiring firms like MTEC.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | 2017-07-04
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