|DBS has become the first to initiate coverage of Medtecs International, whose PPE (personal protective equipment) is in hot demand globally during this pandemic.
Excerpts from DBS report
Analysts: Woon Bing Yong & Lee Keng LING
|Health is wealth
• Initiate coverage with BUY and TP of S$1.30
• Margins to remain high post-pandemic led by higher sales of self-branded products
• M&A or new dividend policy may be in the works due to large cash holdings
Transition to self-branded product sales to mitigate lower postpandemic demand. Personal protective equipment (PPE) demand and average sales price (ASP) are undoubtedly expected to decline as the COVID-19 situation improves.
However, we expect Medtecs International Corporation (MED) ASPs and sales volumes to remain at 90% and 60% above pre-COVID levels, boosted by a higher proportion of sales of self-branded products and new customer relationships formed during the pandemic.
As such, FY22F earnings are expected to be 28.6x times that of FY19.
Compelling value at 6.8x blended FY21/22F P/E. We believe that MED trades at an attractive value, with cash holdings possibly forming c.35% of its market capitalisation by end-FY21.
|Stock visibility and liquidity set for further boost
|"MED’s inclusion in the MSCI Singapore Small Cap Index and application to transfer to the SGX Mainboard could increase stock visibility and liquidity. Generally, institutional investors are more likely to invest in stocks on the Mainboard compared to those on Catalist. Investment by institutions into MED could instil confidence in the stock and boost its share price further."
-- DBS report
In addition, MED trades at a discount from multiple valuation angles.
The Group is valued below both its 5-year mean forward price/earnings (P/E) of 10.8x and 2-year pre-COVID mean P/E of 19.2x.
The stock also trades at a discount to the five-year peer average forward P/E of c.16x.
|Large cash pile hints at M&A activity or dividend policy. We estimate that MED could generate a cash pile of well over US$100m by end-FY21F which could catalyse the Group’s merger and acquisition (M&A) efforts in a post-pandemic world.
Alternatively, it could reinstate its previous dividend policy of paying between c.25% - 50% of earnings.
However, we have assumed a conservative 10% payout ratio from FY21F which represents c.2% FY21F yield or a DPS of 1.89 Scts.
Initiate with BUY and target price (TP) of S$1.30 based on 9.5x blended FY21/22F earnings.
Our scenario analysis also values MED at a range of S$0.80 – S$1.66.
Key Risks to Our View:
Quicker than expected vaccine distribution progress, low levels of post-pandemic stockpiling, higher raw material prices.
Our base case estimates put post-COVID demand for gowns and masks at c.25% and c.5% of demand during pandemic levels, driven by international stockpiling of PPE.
We believe that COVID-19 has heightened the awareness and importance of PPE stockpiling and expect most countries that MED serves to stockpile a reasonable 90 days of PPE, creating medium-term demand for gowns and masks after COVID-19.
Notably, MED’s customers are largely from high income nations such as the UK, Germany and the US which we think possess the capability to stockpile.
In the longer-term, expiring PPE products may give a permanent boost to PPE demand as governments replenish their stockpiles of PPE.
We observe that PPE shelf lives have a range of between 2 – 5 years and think that countries are likely to spread their replenishment needs evenly over the years.
Full report here.