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

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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