Excerpts from UOB Kay Hian report

Analyst: Nicholas Leow

TM Chuang 4.18TM Chuang, executive director.
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Memtech reported 1Q18 results which were in line with expectations.

Net profit fell 16% yoy due to weaker gross margins stemming from an industry-wide poor month in Feb 18.

Sales momentum continued with the automotive segment driving growth. We expect margins to normalise in 2Q18 as our channel checks indicate orders have returned in Mar 18.

Maintain HOLD with a lower PE-based target price of S$1.32 (previously S$1.50) as the sector has de-rated. Entry price: S$1.18.



Memtech Int’l

Stock price: 
$1.24

Target price: 
$1.32

• 1Q18 results in line. Memtech’s group sales were up 14.2% yoy in 1Q18 with the automotive segment clocking a surprising 25.5% yoy growth in sales to US$22.6m.

The industrial and medical segment’s sales more than doubled to US$3.7m yoy due to a low base and as new products went into mass production. The consumer electronics segment’s sales declined 5.3% yoy primarily due to a weak Feb 18.

Feb 18 was a weak month due to customers delaying production ramp-ups and the 2-week-long Chinese New Year break which resulted in low machine and labour utilisations, and this impacted gross margins for the quarter. 1Q and 2Q are typically weaker quarters for the company as consumer electronics ramp-up happens in the second half of the year in preparation for the holiday seasonal demand.

Stock price 

$1.24 

52-week range

76 c- $1.92

PE (ttm)

9.4X

Market cap

S$175 m

Shares outstanding

140.9 m

Dividend 
yield (ttm)

4.4%

1-year return

60%

Source: Bloomberg

• Key drivers moving forward. Memtech has earmarked the consumer electronics and automotive segments as key growth drivers for the group.

The consumer electronics segment has commenced preparations for a ramp-up of projects expected in 2H18 for a major US multinational customer.

In preparation for the ramp-up, capex has increased to US$3.8m for 1Q18. Management remains confident of the group’s prospects for 2018. The anticipated ramp-up in 2H18 coupled with the strong automotive sales growth momentum gives us confidence that the company is on track to meeting our earnings estimates.


STOCK IMPACT
• February was a poor month but March is looking better. Feb 18 was a poor month for most plastic injection moulders (PIM) with factories in China due to the long Chinese New Year break and macroeconomic uncertainty resulting in some customers delaying production ramp-up.

Our channel checks with PIM indicate that orders have normalised in Mar 18 and therefore we expect gross margins to return to the 17% range for 2Q18.

• Healthcare and industrial segment could continue to ramp up. Earlier this year, Memtech registered a separate entity called Kunshan Memtech Medical Equipment Industry Co Ltd. We understand the group is in discussions with a few new potential major medical customers, and this could be a new growth driver come 2019.

The automotive segment should continue to see decent growth as 50-60% of current projects are still in the early to middle mass production stage. The typical lifespan of automotive projects are 5-7 years.

 Strong position in EV production should bear fruit in 2019. Memtech serves a few high-profile electric vehicle (EV) customers such as Tesla and Nio. Under China’s capand-trade policy, automakers must obtain a new-energy vehicle score which is linked to the production of various types of zero- and low-emission vehicles of at least 10% starting in 2019 and rising to 12% in 2020. 

Carmakers from Volkswagen AG to Ford are all trying to ramp up their EV production in China. This trend bodes well for Memtech in the longer term as it has a strong positioning in the manufacturing of EV plastic components which could potentially open new opportunities for the company with global automakers. 


• Sector de-rating. Most contract manufacturers (CM) and PIMs have undergone a significant de-rating over the last few days. We expect sentiment in share prices of CM and PIM to remain weak, given that some peers have missed consensus earnings estimates. We find Memtech fairly valued at current levels.


EARNINGS REVISION/RISK
• No change to our earnings estimates.


VALUATION/RECOMMENDATION
• Maintain HOLD with a lower PE-based target price of S$1.32, pegged to peers’ average 2018F PE of 10.6x (previously 12.0x). Entry price is S$1.18.

SHARE PRICE CATALYST
• Potential privatisation.

• Expansion into new precision engineering segments.

• Potential dividend surprises

Full report here.


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