Memtech International - CIMB Research 2017-08-11: 2Q17 On Track For Better 2H17F

Memtech International - CIMB Research 2017-08-11: 2Q17 On Track For Better 2H17F MEMTECH INTERNATIONAL LTD BOL.SI

Memtech International - 2Q17 On Track For Better 2H17F

  • Memtech International (MTEC)'s  2Q17 core net profit of US$1.9m was within expectations; 2H17 would be stronger.
  • Growth in both AU and CE segments underpinned its turnaround from 2Q16’s loss of US$1.5m and better qoq performance.
  • No change to our FY17-19 forecasts and S$1.16 target price. Reiterate Add.

2Q17 delivered yoy, qoq improvement, as expected

  • MTEC reported 2Q17 core net profit of US$1.9m, up 13.6% qoq and a strong rebound from 2Q16’s net loss of US$1.5m. Overall 1H17 core net profit was US$3.6m, deemed in line at 44% of our full-year forecast as we expect a seasonally stronger 2H17.
  • 2Q17 gross margin of 17.3% was significantly better than 2Q16’s 8.6% in the absence of Beats’ project delay, but dipped from 1Q17’s 18.1% due to slight changes in sales mix. The sale of Huzhou land and factory also took place in 2Q17, resulting in a oneoff gain of US$3.2m.

Core pillars in automotive (AU) and consumer electronics (CE)

  • 2Q17 topline expanded 20.8% yoy and 3.6% qoq, thanks to higher sales of consumer electronics (+53% yoy, +19% qoq), which made up c.37% of total revenue.
  • While the automotive segment appears to be losing steam with 6.0% qoq sales decline in 2Q17 (+15.1% yoy), we are not overly concerned as new orders from existing key customers (e.g. Continental, Magna and Tesla) will kick off in 2H17 to meet our FY17 forecasted sales of US$84m.
  • Revenue contributions from telecommunications and industrial & medical segments were stable in 2Q17. By leveraging on its liquid silicone rubber (LSR) capabilities and multiple injection technology, management sees opportunities in the acoustic and smart home areas.

Stronger net cash position

  • The company continues to be cash-generative, with operating cashflow of US$4.7m in 1H17 vs. US$6.4m in 1H16. 
  • As MTEC increases its inventory level to prepare for a busier 2H17, 1H17 working capital requirements crept up.
  • With minimal borrowings, MTEC’s net cash position strengthened from US$24.7m at end-2016 to US$28.9m at end-Jun 2017, equivalent to c.28% of its market cap.

No change to our EPS forecasts, S$1.16 Target Price and Add rating

  • We maintain our Add rating, FY17-19 forecasts and target price of S$1.16 (pegged to 10.4x FY18F P/E, still at 10% discount to its peers’ average). The stock offers 3-5% dividend yield, with upside potential from the US$6m proceeds from the disposal of two land assets.
  • MTEC currently trades at 9.4x FY18F P/E and 0.9x FY17F P/BV, cheaper than the industry average of 11.8x FY18F P/E, offering investors some safety margin.
  • Downside risks to our Add call include unexpected order delays or cancellations.
  • Synergistic M&A opportunities and special dividends are potential re-rating catalysts.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-08-11
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.160 Same 1.160