Memtech International - CGS-CIMB Research 2018-08-13: 2Q18 Hit By Poor Margins

Memtech International - CGS-CIMB Research 2018-08-13: 2q18 Hit By Poor Margins MEMTECH INTERNATIONAL LTD SGX:BOL

Memtech International - 2Q18 Hit By Poor Margins

  • Memtech International (MTEC)’s 2Q18 core PATMI of US$1m was a miss against our/consensus expectations.
  • Revenue grew 19% y-o-y in 2Q18, but GPM fell to 14.7% (2Q17: 17.3%) due to higher raw material costs, staff costs and more outsourcing of tooling work.
  • We expect q-o-q margin improvement in 3Q18F from better economies of scale.
  • Product pipeline boosted by new auto customer, medical device and military parts.
  • Maintain ADD with lower EPS and S$1.42 Target Price (10x FY19F P/E). MTEC offers 4-5% forecasted dividend yield and currently trades at 0.9x FY18F P/BV.

2Q18 a miss; dragged by lower margin and higher tax rate

  • Memtech reported 2Q18 PATMI of US$2.1m, up 57.4% q-o-q but down 56.9% y-o-y. Excluding one-off disposal gains and FX impact, its core PATMI would have been US$1.0m, missing our/consensus expectations due to weaker gross margins and higher tax expenses.
  • Memtech’s 1H18 US$2.8m core PATMI only formed 21% of our/consensus full-year numbers; we note that 2H is seasonally stronger.

~ ~ Where SG investors share

Auto and industrial & medical led 19% topline growth

  • 2Q18 topline increased 19.1% y-o-y, thanks to both automotive and industrial & medical segments. The 32.6% auto sales growth was underpinned by client acquisition and higher contribution from existing customers (Tesla, Kostal).
  • Industrial & medical revenue surged 79.1% y-o-y on the back of product renewal by a major customer.
  • Consumer electronics revenue was stable y-o-y in 2Q18 but should pick-up in 3Q18F from ramp-up of new products. Structural weakness in telco revenue remains.

Expect cost pressures to linger in the near term

  • The biggest earnings upset stemmed from Memtech’s gross margin decline of 2.6bp y-o-y in 2Q18, which the management blamed on
    1. higher staff expenses,
    2. higher raw material costs and
    3. more outsourcing of tooling work.
  • Memtech faced lower productivity issues from the lack of a stable and skillful labour force, as well as c.10% price hike in plastic resin and silicone. We expect such cost pressures to linger in the near term, but margins could benefit q-o-q from better economies of scale in 3Q18F.

New projects in the pipeline for FY19F

  • Memtech continues to make gains in its customer base, including its first project from a large medical devices company and new components for military products. It also secured a major project for new Mercedes Benz, which should contribute from FY19F onwards.
  • Management also shared that the multiple projects for a major US MNC, for which it has completed sizeable tooling work earlier, remain on track for production.

Key risks and catalysts

  • Memtech International remains in a net cash position of US$23.8m (c.21% of market cap) and also recorded higher operating cashflow of US$9.7m in 1H18 (vs. 1H17’s US$4.7m). Escalating trade tensions and any order delay/cancellation could pose downside risks to our Add call.
  • Potential catalysts are new project wins and positive corporate exercises.

Maintain ADD with lower Target Price of S$1.42

  • We raise our FY18F revenue assumption slightly in anticipation of stronger 2H18 volumes, but cut our FY18-19F EPS by 3-5% on lower margin and higher effective tax rates. Maintain ADD with a slightly lower Target Price of S$1.42, still pegged to industry average of 10x FY19F P/E.
  • Memtech International now offers FY18-20F dividend yields of 4-5% and trades at 0.9x FY18F P/BV.

NGOH Yi Sin CGS-CIMB Research | William TNG CFA CGS-CIMB Research | 2018-08-13
SGX Stock Analyst Report ADD Maintain ADD 1.43 Down 1.470