Excerpts from DBS report

In for the long haul
• FY20 revenue (+480.4%) and earnings (+11-fold) were in line with expectations  

Medtecs

Share price:
95.5 c

Target: 
$1.25

• PPE demand in 1H21 holding steady vs 2H20 with selling prices only inching down  

• On the lookout for expansion opportunities including M&A  

• Maintain BUY with a slightly lower TP of S$1.25

Medtecs DBS 3.21
FY20 revenue and earnings in line

    • Revenue and net profit climbed to US$400.3m (+480.4% y-o-y) and US$131.7m (+11,348.5% y-o-y) respectively as the COVID-19 pandemic drove demand for Medtecs’ personal protective equipment (PPE).
    • Gross profit margins were up 27.6ppts to 42.9%, supported by a higher proportion of sales of Medtecs-branded products.
    • Final dividend per share of US$0.0418 declared, bringing total FY20 DPS to US$0.0503 or S$0.067. The dividend represents c.7% yield based on Medtecs’ closing price of S$0.955.

Manufacturing and Trading & Distribution segments shine

    • The Manufacturing segment saw FY20 revenue rise by 576.4% y-o-y to US$357.8m. Profit before tax margins stood at 34.2% for FY20, an increase from 2.5% in FY19.
    • The Trading & Distribution segment reversed its fortunes and saw FY20 profit before tax rising to US$14.0m from US$0.3m in FY19 driven by higher demand and sales of higher margin products.
    • Hospital Services’ losses before taxes deepened to US$1.4m in FY20 from US$0.1m the previous year as a result of higher labour and linen amortization cost.

Market was expecting a special dividend

    • Following special dividend announcements by peers such as Riverstone and UG Healthcare, Medtecs’ lack of a special dividend may have disappointed the market.
    • Total DPS for FY20 stood at US$0.0503, representing a payout ratio of 21.0%.
    • For comparison, Riverstone had a payout ratio of c.50%. A 50% payout ratio at Medtecs translates to a DPS of US$0.1199 (S$0.1597), representing a yield of 14.5% based on Medtecs’ pre-announcement closing price of S$1.10 on 26 Feb 2021.
    • On this front, we believe Medtecs is looking to conserve cash to expand into new product lines or pursue M&As
    • While success for Medtecs’ expansion is not guaranteed, we believe this is important for the long-term sustainability of the group.

Demand in 1H21 looks stable

    • We believe the market will focus on the potential impact the improving pandemic situation may have on performance in FY21F.
    • We think a better performance across all segments is likely on a y-o-y basis with 1H21 looking stable compared to 2H20.
    • Optimistically, Apron, Gown and Coverall and Face Mask deliveries in England, while having fluctuated, remain higher than in 3Q20 as of Feb-2021.
    • This may indicate that orders for PPE are still being delivered and this is positive for Medtecs.
    • While England may not be the best representative of global PPE demand, the country is one of Medtecs customers. As such, it may offer a good idea of post-vaccination PPE demand with the UK making good progress on its vaccinations (over 20m out of a population of c.67m have received at least 1 dose).
    • In addition, ASP of PPE, while having inched down by an estimated 2-3% from 4Q20, remain healthy leading to our overall view of a stable 1H21.

Maintain BUY with slightly lower TP of S$1.25 (Bear case: S$0.77, Bull case: S$1.60) based on pre-COVID low P/E of 9.5x on blended FY21/22F earnings.

Our TP was revised down as we adjusted our base case assumptions for the Hospital Services and Trading & Distribution segments which were slightly too optimistic.

This was also the reason behind our marginal 4% downward revision in FY21F earnings.

Full report here


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