Excerpts from analyst's report


renfred_sunsineKGI Fraser analyst
: Renfred Tay (left)

We initiate coverage on Memtech, a Singaporean component manufacturer for the automotive and electronics industry, with production plants in China. Like a few other players, such as Innovalues (IP SP, BUY), Memtech had gained entry into the booming automotive supply chain and is experiencing a resurgence in its business, whilst still trading at very attractive valuations.


From keypads to automotive components. Memtech was once a major keypad solutions provider to many mobile phone makers (80
90% of revenue at its peak) before the advent of smartphones and touchscreens. Sensing a shift in preference towards touchscreens, Memtech had tried to morph its business and acquired a Korean touchscreen maker.

About two years ago, a decision was undertaken to discontinue this business, which had failed to take off due to keen competition. During the same period, Memtech also managed to carve an entry into the automotive supply chain. By 2014, Memtech’s fortunes had turned around.

Stronger years ahead. Automotive revenue grew by 52% in 2014, with an increase in revenue contribution to 33% from 26% a year ago. Management expects to continue to see good growth and margin expansion from this segment, but also highlighted that revenue growth should also be expected for the industrial and consumer electronics segments as well.

We expect total revenue to grow by 9
13% over the next three years along with margin expansion. Net profit is expected to grow by 20% in 2015.

Stock price 
(13 Apr 2015)

14 cents

52-week range

8 – 14 cents

Core PE (ttm)

12.1

Estimated P/E (12/2015)

9.2

Market cap

S$98.8 million

Price/book

0.6

Dividend yield
KGI Fraser data

4.3%

Higher dividends. Memtech had never stopped paying dividends, even when the going got tough. The company was also never shy from paying better dividends when business was good. Its FY14 dividend yield of 4.3% (on 0.6 Sct payout) is attractive. However, we are expecting an even higher payout of 0.9 Scts for FY15, which translates to a yield of 6.4%.

Attractive valuation. Memtech is currently trading at only 9.2x FY15F P/E on 3
yr CAGR of 24%. It is also trading much cheaper than local peers, such as Innovalues (11.6x), who is also benefiting from the booming automotive supply chain.

In terms of book value, Memtech is trading at only 0.6x FY15F P/B, of which S$0.06 per share is backed by cash. We initiate Memtech with a BUY rating at TP of S$0.17 pegged at 11x FY15F EPS.


QuoteMemtech (14 cents) is currently in a net cash position of US$30.5m (~S$42m) or 43% of its market capitalization. If cash were to be excluded, Memtech would only be trading at only 2.4x FY15F P/E. Any asset that is growing at a 3‐CAGR of 24%, with stable cash flows, and trading at a P/E of just 2.4x has got to be a value buy, we believe. In a theoretical sense, if an investor were to fully acquire Memtech today, this investor could essentially extract all the cash from the company and recoup all its capital invested in less than 2.4 years.

Moreover, Memtech is currently trading at its FY15F P/B of 0.6x at an expected ROE of 7‐10% over the next three years. We think the net assets of Memtech should not be trading at less than book value given its extremely low debt level, and expected return potential. In addition, Memtech’s expected book value per share (BVPS) is S$0.23. Of this, S$0.06 per share of BVPS is actually net cash. This implies that Memtech’s current P/B could actually be even lower than it appears, if no discount in value is pegged to this net cash level, which, in our view, ought to be the case.  

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