Memtech International​​​​​​​ - CGS-CIMB Research 2018-11-08: 3Q18 At Customers’ Whims And Fancies


Memtech International​​​​​​​ - 3Q18: At Customers’ Whims And Fancies

  • Memtech International's 3Q18 core net profit of US$2.9m was a miss due to weaker margins.
  • Barring any major delays, we project 10% topline growth and stronger margins to drive our 17- 19% EPS growth p.a. over FY19- 20F.
  • Maintain ADD with 6- 8% dividend yield; we think the recent correction has priced in near-term weakness at 6.2x FY19F P/E and 0.6x FY18F P/BV.

3Q18 disappointed despite seasonality boost

  • Memtech International (MTEC)’s 3Q18 core net profit of US$2.9m (+192.1% q-o-q, -28.6% y-o-y) was below our/consensus expectations. 9M18 core earnings only formed 47% of our/consensus full-year forecasts.
  • Even though 3Q18 topline increased by 16.3% y-o-y, underpinned by stronger demand from automotive (+23.8% y-o-y) and industrial & medical (+76.1% y-o-y), this was offset by weaker gross margins (3Q18: 16.9%, 2Q18: 14.7%, 3Q17: 18.4%).

Margins below expectations due to delays in customers’ projects

  • Margin weakness has been apparent for MTEC since 1Q18, which management attributed to
    1. rising labour costs in China,
    2. higher raw material costs and
    3. lower manufacturing yield.
  • 3Q18 saw partial margin recovery due to a significant shift in peak volume of a major US customer to 1Q19. This affected utilisation levels of the Dongguan plant (c.40%), vs. the estimated 80% utilisation rate for both Nantong and Kunshan factories in 3Q.
  • We expect similar margin trends in 4Q18F, before improving in 2019F.

Still a proxy for growing EV and acoustic popularity

  • Barring any major delays, we remain optimistic on MTEC’s penetration into the acoustic and electric vehicle (EV) segments, with customers like Bose, Nio, Lynk & Co and BYD. Management expects one of its key customers (Beats) to refresh and transition to newer models in FY19F.
  • Apart from possible new order wins, we also see potential growth from its existing auto customers as most of the products continue to be in the ramp-up phase of the lifecycle.

Near-term earnings weakness priced in; maintain ADD

  • As we lower our sales growth and margin assumptions, our FY88-88F EPS falls by 88.8- 88.8%. Our target price falls to S$8.88 even as we roll over our valuation to end-FY88F, now based on a lower P/E multiple of 8x (previously 88x), which is at a 88% discount to sector average.
  • Maintain ADD as we anticipate an earnings recovery in FY88F, and believe its near-term weakness is already priced in at 8.8x FY88F P/E and 8.8x FY88F P/BV, post the 88% share price correction since its peak.

Key catalysts and risks

  • Memtech International remains in a net cash position of US$8.88/shr (c.88% of its current market cap), and offers 8-8% FY88-88F dividend yield.
  • Downside risks to our ADD call are order delays/cancellation and escalating trade woes.
  • New project wins and synergistic M&As are potential re-rating catalysts.

NGOH Yi Sin CGS-CIMB Research | 2018-11-08
SGX Stock Analyst Report ADD MAINTAIN ADD 1.10 DOWN 1.430