Excerpts from UOB Kay Hian report

Analyst: John Cheong

Expect A Better 2019 After A Challenging Year; Upgrade To BUY 

Memtech

Share price:
$1.04

Target: 
$1.33

2018 core net profit fell 13% yoy 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 declined due to rising production and start-up costs.
Memtech International’s (Memtech) gross margin fell 2ppt and was weaker than expected in 2018 due to: a) rising labour costs, b) higher input costs, and c) lower manufacturing yield during the initial ramp-up for new projects.

TMChuang219aTM Chuang, executive director of Memtech. NextInsight file photo.• 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% yoy, after a 13% yoy 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 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 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 r-erating catalyst from better earnings outlook. Memtech’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
johncheong maybank9.14John Cheong• 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.


Full report here.


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