Memtech International - CIMB Research 2017-11-10: 3Q17 A Turbo-charged Quarter

Memtech International - CIMB Research 2017-11-10: 3Q17 A Turbo-charged Quarter MEMTECH INTERNATIONAL LTD BOL.SI

Memtech International - 3Q17 A Turbo-charged Quarter

  • Memtech International (MTEC)’s 3Q17 core net profit of US$4.2m (+32% yoy, +114% qoq) was above our expectations. 9M17 core net profit formed 81% of our full-year forecast.
  • The muted revenue in 3Q17 was partly due to a more selective uptake of CE projects, but management remains optimistic on its core pillars in AU and CE.
  • Gross margin gained 7% pts from better product mix and operational efficiency.
  • Maintain Add with higher FY17-19F EPS and TP as we roll over our valuation to endFY19 P/E (pegged to 10x). MTEC offers a 4-5% forecast dividend yield.

3Q/9M17 core net profits above expectations 

  • Memtech International (MTEC) reported US$46m in sales in 3Q17, flat yoy but up 22.4% qoq as 2H is seasonally stronger. 
  • While 9M17 topline was a slight miss against our full-year expectations, its core net profit was a beat when matched against our FY17F numbers, thanks to gross margin expansion, higher operational efficiency and lower-than-expected tax rate. 
  • Excluding a one-off sale of land assets in 2Q17, its 3Q17 and 9M17 core PATMI surged 32% and 285% yoy respectively, successfully closing the chapter on Beats’ delay in 2016.

Automotive segment still in the driver’s seat 

  • The automotive (AU) segment was the main earnings driver in 3Q17 (+17.3% yoy), which accounted for 44% of total sales (3Q16: 37%), on the back of higher sales contribution from key customers like Kostal, Magna, Tesla and Continental. 
  • Memtech continues to see potential in AU given the rise of opportunities with domestic auto manufacturers in China, while exciting consumer electronics (CE) projects from both new and existing clients (e.g. Beats) are also underway (some still in development phase) for FY18-19F.

Margin expansion on improved product mix and greater efficiency 

  • Management attributed the slight 3Q17 revenue disappointment (flat yoy) to
    1. slower progress in the Tesla production, and
    2. more selective take-up of CE projects against the backdrop of tight labour supply in China. 
  • However, this was offset by a more favourable product mix and more streamlined operations, which saw gross margins expand to 18.4% in 3Q17 (9M16: 14.6%, 9M17: 18.0%).

MTEC offers 4-5% FY17-19F dividend yields 

  • The company recorded a positive operating cashflow of US$8.4m in 9M17, and has net cash/share of S$0.29 as of end-3Q17, which makes up c.27% of its market cap. 
  • With no major capex needs in the near-term and recent proceeds from the sale of land completed in 2Q17, we expect MTEC to pay out 40% of its net profit for FY17F (above its dividend policy of at least 30%), translating into a 4% dividend yield.

Raise FY17-19F EPS and TP, reiterate Add 

  • We lower our sales assumptions for FY17-19F, but our EPS is increased by 1.7-20.3% on the back of higher gross margins and lower tax rates. 
  • Our target price is also higher at S$1.33 (based on 10x P/E, at 20% discount to peers’ average due to smaller market cap) as we roll over our valuation to end-FY19F.
    We reiterate Add on robust company fundamentals and sector rally. 
  • Stronger earnings delivery and higher-than-expected dividends are catalysts, while order delays and cancellations are key risks to our call.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | 2017-11-10
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.33 Up 1.160