Memtech International (MTEC SP) - UOB Kay Hian 2018-04-06: Fundamentals Intact But Fairly Valued; Further Overhang From Trade War

Memtech International (MTEC SP) - UOB Kay Hian 2018-04-06: Fundamentals Intact But Fairly Valued; Further Overhang From Trade War MEMTECH INTERNATIONAL LTD BOL.SI

Memtech International (MTEC SP) - Fundamentals Intact But Fairly Valued; Further Overhang From Trade War

  • Since our initiation at S$0.79 in Apr 17 (see report: Memtech International - An Under-Appreciated Gem), the stock has returned a healthy 102%. 
  • We still like Memtech International for its strong balance sheet, entrenched position in the automobile precision engineering segment and minority shareholder-friendly management. However, at Memtech's current share prices, we believe the company is fairly valued.
  • Trade war fears remain, which may continue to be an overhang on the stock.
  • Downgrade to HOLD with PE-based target price of S$1.50. Entry price: S$1.35.



WHAT’S NEW


Trade war impact. 

  • Due to the escalating trade war between the US and China, China will hit many US-made plastic products with tariffs. On 4 Apr 18, China announced tariffs on 106 US products which include plastics, machinery and moulds. China is proposing tariffs on plastic materials and plastic products from the US while the US is proposing tariffs on plastic machinery from China. 
  • Even though it is relatively premature to quantify the impact such tariffs would have on Memtech as the final tariff details and effective dates are yet to be finalised, we do not expect the direct impact to Memtech to be significant for three reasons:
    1. a large majority of materials such as plastic resin are locally sourced in China, 
    2. Memtech does not export moulds to the US, and
    3. most of Memtech’s products are delivered to contract manufacturers in China and South America with the only exception being Tesla for which Memtech ships to the US. 
  • Hence, we believe the direct impact on Memtech would not be significant but quantifying the indirect impact at this juncture would be premature.

Tesla likely to be hit the most in the trade war. 

  • Among the US automakers, Tesla is likely to be hurt the most by the trade war. The Detroit Big 3 car makers - Ford, General Motors and Chrysler - have JVs with Chinese companies that would likely shield them from tariffs. For instance, General Motors assembles most of the vehicles it sells in China domestically. However, Tesla imports vehicles to China which could mean that Chinese buyers might end up paying a 50% tariff rather than the current 25% tariff on imported vehicles. 
  • Currently, about 12% of Tesla’s Model S and X vehicles go to China. Even though Tesla is Memtech’s eighth-largest customer, we estimate only about 3% of Memtech’s sales are from Tesla and thus any impact from Tesla would be capped.


STOCK IMPACT


Fundamentals intact but fairly valued. 

  • We continue to like Memtech for its strong balance sheet, willingness to pay generous dividends, strong exposure to the high-barrier automobile precision engineering segment, and strong growth from both the automobile and consumer electronics segments due to its ability to attract new blue-chip customers. However, the stock is fairly valued at current levels.


EARNINGS REVISION/RISK

  • No change to our earnings estimates.


VALUATION/ RECOMMENDATION

  • Downgrade to HOLD with PE-based target price of S$1.50, pegged to peers’ average 2018F PE of 12.0x. Entry price is S$1.35. 
  • We could see upside to our target price should the recently-acquired major US consumer electronics customer go into mass production earlier than expected.


SHARE PRICE CATALYST

  • Potential privatisation.
  • Expansion into new precision engineering segments.
  • Potential dividend surprise.




Nicholas Leow UOB Kay Hian | http://research.uobkayhian.com/ 2018-04-06
UOB Kay Hian SGX Stock Analyst Report HOLD Downgrade BUY 1.50 Up 1.430



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