Small-Cap Manufacturers - UOB Kay Hian 2018-11-26: Challenging Times But Long-Term Positive

Small Cap Manufacturers - UOB Kay Hian Research | SGinvestors.io VALUETRONICS HOLDINGS LIMITED (SGX:BN2) SUNNINGDALE TECH LTD (SGX:BHQ) MEMTECH INTERNATIONAL LTD (SGX:BOL)

Small-Cap Manufacturers - Challenging Times But Long-Term Positive

  • Two out of three companies under our coverage missed our earnings expectations in 3Q18 and we have reduced our FY18-19 net profit estimates by 5% to 18%. The three key challenges are:
    1. rising labour costs;
    2. rising costs of raw materials and utilities; and
    3. pricing pressure as customers turn more cautious on increasing risks of trade tensions.
  • However, most companies remain positive for the long term on more new projects and diversified customer base.
  • Our top pick is Valuetronics.



WHAT’S NEW


Two out of three companies missed our net profit forecasts.


Headwinds impacted gross margins particularly; top-line growth remained healthy.

  • The three key challenges for the sector are:
    1. rising labour costs, especially for plants in China;
    2. rising costs of raw materials and utilities due to higher crude oil prices; and
    3. pricing pressure as customers turn more cautious on increasing risks of trade tensions.
  • Some customers have even delayed orders to wait for a recovery in consumers’ sentiment.
  • Sunningdale and Memtech recorded revenue growth but their gross margins were impacted by rising costs and pricing pressure.
  • Valuetronics reported a marginal decline in revenue but a higher gross margin due to better performance from its higher-margin industrial and commercial electronics (ICE) segment and a temporary disruption to its lower-margin consumer electronics (CE) segment.

Long-term prospects remain positive on more future orders.

  • All companies remain confident in securing more orders, especially in the consumer electronics and automobile segments.
  • Valuetronics continues to see good demand for connectivity modules used in the automobile industry while Memtech expects delayed orders from a major US MNC client to flow through in 1Q19.
  • Sunningdale is confident of its resilient business model, backed by its global presence which spans 20 manufacturing sites in nine different countries.

Our top pick is Valuetronics.

  • Valuetronics is the only BUY among small-cap manufacturing companies under our coverage. Its valuation remains attractive at 2.2x FY19F EV/EBITDA and FY19F ex-cash PE of 3.3x. Its net cash continued to increase to S$152.7m, or 55% of its market cap.


ACTION


Valuetronics (SGX:BN2).

  • 2QFY19 net profit declined 13% y-o-y due to a one-off flood provision. Excluding that, net profit would have increased 14% y-o-y. Growth momentum of the ICE segment remained robust at 21% y-o-y, while that of the CE segment fell 22% y-o-y due to temporary disruption from the flood.
  • We cut our FY19-20 EPS forecasts by 5% and 2% to include provision for the flood, and reduce our target price from S$0.96 to S$0.87, pegged to peers’ average of 10.9x FY19F PE.
  • Valuetronics' business outlook remains positive. Maintain BUY.
  • See report: Valuetronics - 2QFY19 Robust Results Masked By One-Off Flood Provision

Sunningdale Tech (SGX:BHQ).

  • 3Q18 core net profit missed our expectations, declining 52% y-o-y due to gross margin compression. 9M18 core net profit met only 65% of our full-year estimate.
  • We cut our FY18-20F EPS forecasts by 14-18%. Sunningdale is cautious of headwinds from rising production costs and the trade war but remains confident of its resilient and diversified business model.
  • Downgrade to HOLD and cut our target price by 12% to S$1.50, pegged to peers’ average of 10.6x 2019F PE. Entry price is S$1.25.
  • See report: Sunningdale Tech - 3Q18 Rising Costs And Pricing Pressure; Downgrade To HOLD

Memtech International (SGX:BOL)

  • 3Q18 net profit fell 19% y-o-y and missed our expectations, 9M18 net profit met only 64% of our full-year estimate. Gross margin was compressed due to rising input costs and project delays at several key customers.
  • We cut our 2018-20 net profit forecasts by 5% each, and cut our PE-based target price to S$0.91 from S$0.95 (9.6x 2018F PE).
  • Memtech is optimistic of a better 2019 on a healthy pipeline of new projects. Maintain HOLD. Entry price is S$0.70.





John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-11-26
SGX Stock Analyst Report BUY MAINTAIN BUY 0.870 SAME 0.870
HOLD MAINTAIN HOLD 1.500 SAME 1.500
HOLD MAINTAIN HOLD 0.91 DOWN 0.950



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