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.

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.

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.

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.

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.

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.

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 | http://research.itradecimb.com/ 2017-07-04

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