SINGAPORE (Mar 7): CIMB is optimistic on Memtech International projects from new customers like Tesla, Beats and Bose giving earnings a boost.
The research house is also raising its target price to $1.76, based on 12 times FY19 earnings from 10 times previously.
"We think Memtech deserves to trade at a slightly higher P/E multiple than the regional industry average of 11.4 times, given its stronger three-year EPS CAGR of 13.8% versus 12.6% for the industry," says lead analyst Ngoh Yi Sin in a Tuesday report.
On Mar 2, CIMB took Memtech on a non-deal roadshow (NDR) to Kuala Lumpur. Investors were said to be interested in the group's competitive edge, customer base and other potential projects.
Memtech entered the auto business about five years ago, serving original equipment manufacturers (OEMs). Tesla subsequently became Memtech's first Electric Vehicle (EV) customer, to which it supplies plastic parts worth US$15-20 per car ($19.8-$26.3) on average.
More importantly, the project paved the way for orders from Nio and Wey. "We expect these projects to form a growing earnings base as they enter mass production and new orders from EV clients to offer earnings uplift in the medium term," says Ngoh.
As for headphones maker Beats, three of its projects are already in production and Memtech was awarded two others for FY18. There were also recent contract wins for smart home products and audio-related devices.
Memtech also undertook several tooling orders from a certain "customer A", which management believes would translate into sizeable projects for various accessories in 2H18 onwards. "We estimate CE sales to increase by 10-18% p.a. over FY18-20," says Ngoh.
During meetings, investors often asked for a comparison between Memtech and its peers.
"We think the group is most similar to Sunningdale Tech and Hong Kong-listed TK Group in terms of service offering (plastic solutions) and customer industry exposure," says the analyst.
In contrast to these peers, MTEC specialises in smaller components and has expertise in liquid silicone rubber (LSR) and conductive rubber pills, with minimal revenue contribution from mould fabrication.
In FY17, Memtech delivered a the strong set of results. It also declared a DPS of 5.5 cents (FY16: 2.5 cents), which Ngoh thinks is sustainable given its rising earnings.
"We raise FY18-19 EPS by 8.1-10.3% on better gross margins and cost control, and introduce FY20. We estimate FY18-20 yields of 3.8-4.4%," says the analyst.
As at 11.40am, shares in Memtech are up 7 cents or 4.6% at $1.61.
