Memtech International - CIMB Research 2018-04-26: 1Q18 Unfazed By The Seasonal Weakness

Memtech International - CIMB Research 2018-04-26: 1q18 Unfazed By The Seasonal Weakness MEMTECH INTERNATIONAL LTD BOL.SI

Memtech International - 1Q18 Unfazed By The Seasonal Weakness

  • Memtech International 1Q18 core net profit of US$1.8m (+8% y-o-y) was within our/consensus expectations.
  • Gross margin decline is temporary; we expect improvement as sales catch up in 2H.
  • Order pipeline intact; hence, no change to our FY18-20F EPS estimates.
  • But we expect spillover from weak sector sentiment; hence, lowering our Target Price to S$1.47, pegged to 10x FY19F P/E (prev12x), in line with industry average.
  • We continue to like the stock for its double-digit earnings growth, 4% dividend yield, balance sheet strength and customer diversification efforts. Maintain ADD.

1Q18 core net profit in line; seasonally weaker

  • Memtech International (MTEC) posted 1Q18 net profit of US$1.3m, which was 16% lower than 1Q17 and formed 10% of our/consensus full-year forecasts. Excluding US$0.5m FX loss, core net profit would have improved 8% y-o-y to US$1.8m, deemed in line as we forecast a seasonally stronger 2H18. 
  • 1Q revenue and core net profit historically account for 22% and 12% of MTEC’s full-year numbers, respectively. A lower gross margin of 14.5% (1Q17: 18.1%), from temporary labour shortage and resource allocation, offset the 14% y-o-y sales growth.

Automotive sales not losing steam

  • Automotive sales outperformed in 1Q18, up 26% y-o-y thanks to increasing sales from existing customers like Kostal, Continental and Tesla, which now account for c.5% of MTEC’s overall topline, based on our estimates. 
  • With most of its existing projects still midway through their lifecycle, and new customer wins such as LG automotive and BYD Auto, we expect to see progressive growth from the auto segment.

Consumer electronics to ramp up in 2H

  • We attribute the slight decline in MTEC’s consumer electronics (CE) revenue (-5% y-o-y) to 
    1. focus shift towards higher-margin parts, 
    2. lower consumer demand due to product lines refresh, and 
    3. resource allocation to prepare for mass production in 2H18 for a leading CE player. 
  • We also see potential in its industrial & medical segment, which saw 103% y-o-y sales growth thanks to the launch of a new series of IoT-enabled, handheld scanner, and possibly adding radio communication devices to its product portfolio.

Healthy balance sheet plus 4% dividend yield

  • Despite higher capex requirements to cater for new projects (1Q18: US$3.8m, 1Q17: US$1.9m), MTEC remains in a strong net cash position, which makes up c.20% of its market cap. 
  • The stock offers decent forecasted yield of 4.1-4.8% in FY18-20F, and currently trades at 10.9x FY18F P/E, slightly below peers’ average of 11.3x.

Maintain Add with a lower Target Price of S$1.47

  • With the order pipeline still intact, we retain our FY18-20F assumptions and ADD call, but lower our target price to S$1.47, based on 10x FY19F P/E (prev. 12x) on the back of sector de-rating, on par with industry average. 
  • Potential catalysts are new project wins and positive corporate exercises; any order delay or cancellation, particularly from its major customers, may lead to downside risks.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2018-04-26
SGX Stock Analyst Report ADD Maintain ADD 1.47 Down 1.760