Medtecs International - DBS Research 2021-05-07: Longer-Term Concerns Arise

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MEDTECS INTERNATIONAL CORP LTD (SGX:546)

Medtecs International - Longer-Term Concerns Arise

• Medtecs International's 1Q21 performance missed expectations; revenue down ~63% q-o-q.
• Gross margin of ~44% despite volume decline may indicate that the decline in ASP is bottoming.
• Longer-term earnings sustainability in focus.
• Downgrade to HOLD with lower target price.

Medtecs International's 1Q21 performance disappoints

• Medtecs International (SGX:546)'s 1Q21 revenue came in at US$42.2m (+5.9% y-o-y, -62.7% q-o-q), below expectations. 1Q21 earnings followed the same trend at US$13.2m (+259.9% y-o-y, -71.9% q-o-q)
• While no reason was provided yet for the decline in performance, we opine that a few risk factors may have played out including a quicker pace of vaccination which has led to lower COVID-19 cases in key geographies and a loss of market share to domestic suppliers.
• Medtecs International also announced that it has started site selection for the construction of a personal protective equipment manufacturing facility.
• A bright spot was Medtecs International’s gross margin of ~44%, possibly signalling that the proportion of self-branded product sales remained respectable.
• Another positive was clinching supply contracts in the Philippines and Cambodia, although the size and length of these contracts remain to be seen.

COVID-19 situation update.

• Vaccination progress in key geographies including the UK, Germany and Singapore are progressing well at ~39%, ~18% and ~19% of population already fully vaccinated*. However, the Philippines and Cambodia, where Medtecs International has manufacturing operations in, have seen a surge in COVID-19 cases in recent weeks although the Philippines appears to be past the peak.

England aprons, gowns and coveralls (AGC) usage was stable in the UK; face mask trended higher.

• Deliveries of AGCs were stable in England in the past few months, averaging ~29.6m pieces weekly during 28 February 2021 – 28 March 2021.
• On the other hand, usage of face masks trended higher which runs contrary to Medtecs International’s 1Q21 performance. One possibility for this is the loss of market share to domestic PPE suppliers. Indeed, the UK was reported to be targeting for 70% of expected PPE demand to be met by domestic production by December 2020.

Downgrade Medtecs to HOLD with a lower target price.

• Our bear case for a much lower sales volume appears to have played out and we have accordingly reduced Medtecs International's FY21F earnings forecast by 27%. FY22F earnings forecast were raised to reflect stabilising margins.
• While we see the potential for Medtecs International’s performance to be stronger in the near-term especially with the new supply contracts secured in the Philippines and Cambodia, we are concerned over the longer-term prospects of the company and are looking for drivers of earnings sustainability. Thus, we have shifted our valuation timeframe and our valuation is now based on 10.0x (Medtecs International’s pre-COVID low P/E) FY22F earnings to reflect the declining earnings trend.
• See
  • Medtecs International's Share Price,
  • Medtecs International's Target Price,
  • Medtecs International's Analyst Reports,
  • Medtecs International's Dividend History,
  • Medtecs International's Announcements,
  • Medtecs International's Latest News.

Medtecs' large cash pile still hints at potential M&A or higher dividend.

• We forecast that Medtecs International could accumulate a cash pile of well over US$100m by end-FY21F, potentially fueling the group’s M&A efforts or be paid out as dividends.

Woon Bing Yong DBS Group Research | Lee Keng LING DBS Research | https://www.dbsvickers.com/ 2021-05-07

SGX Stock Analyst Report HOLD DOWNGRADE BUY 0.92 DOWN 1.250