Memtech International - CIMB Research 2018-03-06: Key Takeaways From Kuala Lumpur NDR

Memtech International - CIMB Research 2018-03-06: Key Takeaways From Kuala Lumpur NDR MEMTECH INTERNATIONAL LTD BOL.SI

Memtech International - Key Takeaways From Kuala Lumpur NDR

  • We took Memtech International (MTEC)’s management on a non-deal roadshow (NDR) to KL where investors were keen to learn about its competitive edge, customer mix and project pipeline.
  • We forecast 12-15% core EPS growth p.a. in FY18-20F for MTEC, driven by both new and existing projects under the auto and consumer electronics segments. MTEC’s ongoing new customer wins (Tesla, Beats, Nio, Wey, Bose) is a testament to its tooling capabilities and track record, in our view.
  • Net cash makes up c.20% of its current market cap.
  • We raise FY18-19F EPS by 8.1-10.3% (better gross margins, cost control), resulting in higher Target Price of S$1.76, based on 12x FY19F P/E (above regional peers’ 11.4x).

Earnings growth outlook intact 

  • On 2 March 2018, we took MTEC on a non-deal roadshow (NDR) to Kuala Lumpur (KL), where investors were interested in its competitive edge, customer base and other potential projects. 
  • We remain optimistic on its earnings growth outlook, with both automotive (auto) and consumer electronics (CE) segments as the key drivers, even after the strong set of FY17 results (core net profit +112% y-o-y). 
  • The group declared FY17 DPS of 5.5Scts (FY16: 2.5Scts), which we think is sustainable given its rising earnings.

Well positioned for the electric vehicle (EV) uptrend 

  • Memtech International (MTEC) entered the auto business about five years ago, serving original equipment manufacturers (OEMs) and tier-1 manufacturers like Kostal, Magna and Continental. Tesla subsequently became MTEC’s first EV customer, to which it supplies plastic parts worth US$15-20 per car on average. This paved the way for orders from Nio and WEY.
  • We expect these projects to form a growing earnings base as they enter mass production and new orders from EV clients to offer earnings uplift in the medium term.

Multiple consumer electronics (CE) projects ahead 

  • Order pipeline for MTEC’s CE segment remains robust. Apart from the three Beats’ projects already in production, MTEC was awarded two others for FY18F, in addition to recent customer wins for smart home products and audio-related devices. It also undertook several tooling orders from customer A, which management believes would translate into sizeable projects for various accessories in 2H18F onwards. 
  • We estimate CE sales to increase by 10-18% p.a. over FY18-20F.

MTEC vis-à-vis its regional peers 

  • During meetings, investors often asked for a comparison between MTEC and its peers.
  • We think the group is most similar to Sunningdale Tech (SUNN SP, Rating: Add, Target Price: S$2.82, see report: Sunningdale Tech Ltd - Ignore The FX Noise) and TK Group (2038 HK, Add, Target Price: HK$6.50) in terms of service offering (plastic solutions) and customer industry exposure. 
  • In contrast to these peers, MTEC specialises in smaller components and has expertise in liquid silicone rubber (LSR) and conductive rubber pills, with minimal revenue contribution from mould fabrication.

Maintain Add; raise FY18-19F EPS by 8.1-10.3% 

  • We raise FY18-19F EPS by 8.1-10.3% on better gross margins and cost control, and introduce FY20F. Our Target Price rises to S$1.76, based on 12x FY19F P/E vs. 10x previously as we think MTEC deserves to trade at a slightly higher P/E multiple than the regional industry average of 11.4x, given its stronger 3-year EPS CAGR of 13.8% (industry: 12.6%). 
  • We estimate FY18-20F yields of 3.8-4.4%. 
  • Re-rating catalysts: strong earnings growth and positive corporate exercises. 
  • Risks: Order delay/ cancellation.

Well positioned for the EV uptrend 

  • MTEC first entered the auto business five years ago, serving traditional OEMs and tier-1 manufacturers like Kostal of America (Unlisted), Magna International (MGA US, Not Rated) and Continental (CON GR, Not Rated). Tesla (TSLA US, Not Rated) subsequently became its first electric vehicle (EV) customer, to which it supplies plastic parts worth US$15-20 per car on average, across three models. 
  • MTEC’s solid track record and tooling/ injection moulding capability have helped it earn vendor qualification for other electric car makers, including Next Car (NIO, Unlisted), WEY (part of Great Wall Motors, 2333 HK, Not Rated) and Lynk & Co (part of Geely Automobile Holdings, 175 HK, Not Rated).
  • In FY17, Tesla was one of MTEC’s top ten customers by sales, accounting for close to 3% of its total revenue. As the sole source of the plastic parts that it currently supplies to Tesla, we expect MTEC to benefit from growing volumes.
  • According to its announcements, Tesla targets to resolve its production issues and increase its capacity from an estimated 1k units per week currently, to 2.5k units per week (by end-Mar 2018) and potentially, to 5k units per week (by end2Q18). We expect MTEC’s existing projects from the traditional OEMs and tier-1 suppliers to form an expanding earnings base as they enter mass production, while new orders from EV clients could offer earnings uplift in the medium term (FY19-20F).

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2018-03-06
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.76 Up 1.330