Memtech International - UOB Kay Hian 2019-03-01: Expect A Better 2019 After A Challenging Year; Upgrade To BUY

MEMTECH INTERNATIONAL LTD (SGX:BOL) | SGinvestors.io MEMTECH INTERNATIONAL LTD (SGX:BOL)

Memtech International - Expect A Better 2019 After A Challenging Year; Upgrade To BUY

  • Memtech International's 2018 core net profit fell 13% y-o-y due to rising production and start-up costs for new projects, in line with our expectations. However, we expect 2019 to be a better year on more new projects and a boost from several major projects delayed in 2018.
  • We raise our 2019-20 net profit forecasts by 9-10%, and our target price by 40% to S$1.33, based on peers’ average 2019F PE of 11.0x (from 9.8x of 2018 PE).
  • Upgrade to BUY with a 35% price upside.



2018 RESULTS


2018 results declined due to rising production and start-up costs.

  • MEMTECH INTERNATIONAL LTD (SGX:BOL)’s gross margin fell 2ppt and was weaker than expected in 2018 due to:
    1. rising labour costs,
    2. higher input costs, and
    3. lower manufacturing yield during the initial ramp-up for new projects.

Expect 2019 to be a good year on new projects and boost from major projects delayed in 2018.

  • We expect net profit for 2019 to grow 31% y-o-y, after a 13% y-o-y decline in 2018. The main growth driver is expected to come from several new projects in the consumer electronics and medical segments.
  • Production in 1H19 is expected to pick up significantly as several new and existing multinational customers are targeting new product launches.

Compelling BUY for strong earnings growth and attractive valuation.

  • Memtech International is a compelling BUY for a strong 2019F net profit growth of 31%. In addition, it has an attractive valuation of 8.1x 2019F PE, a discount of 26% to peers’.
  • Also, Memtech International has a strong balance sheet with net cash of US$21.3m (S$28.8m), equivalent to 20% of its market cap. Its 2019F ex-cash PE is only 7x.


STOCK IMPACT


Good re-rating catalyst from better earnings outlook.

  • Memtech International’s business in 2019 should get a lift from more new projects, including a major US MNC client in the consumer electronics segment.


EARNINGS REVISION/RISK

  • We raise our 2019-20 net profit forecasts by 9-10% on better sales from more new projects, and higher gross margins from higher utilisation rates and pricing from new projects.
  • Risks include higher-than-expected raw material costs, unfavourable forex rates, further pricing pressure from customers and lower-than-expected utilisation.


VALUATION/RECOMMENDATION

  • Upgrade to BUY and we raise target price by 40% to S$1.33, pegged to peers’ average 2019F PE of 11.0x (from 9.8x of 2018 PE) following the sector’s re-rating.


SHARE PRICE CATALYST

  • Lower raw material prices.
  • Faster-than-expected ramp-up of a new US MNC customer.
  • Potential privatisation.





John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-03-01
SGX Stock Analyst Report BUY UPGRADE HOLD 1.33 UP 0.910



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