DBS Group Research’s Woon Bing Yong and Ling Lee Keng have downgraded their rating for Medtecs International from ‘buy’ to ‘hold’, as well as lowering their target price to 92 cents from $1.25.
They cited a “disappointing” performance for 1QFY2021, noting the decline in revenue to US$42.2 million ($55.87 million).
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This is 5.9% higher y-o-y, but 62.7% lower q-o-q. The company’s 1QFY2021 earnings followed the same trend at US$13.2 million, which is 259.9% higher y-o-y but 71.9% lower q-o-q.
The analysts note that “while no reason was provided yet for the decline in performance, we opine that a few risk factors may have played out, including a quicker pace of vaccination which has led to lower Covid-19 cases in key geographies and a loss of market share to domestic suppliers.”
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As such, this performance decline in 1QFY2021 has brought about concerns on the longer-term
sustainability of Medtecs earnings. Woon and Ling also highlight that there is uncertainty that the transition to self-branded products will mitigate decreased demand.
They say that demand for PPE is expected to decline as the COVID-19 situation improves, but Medtecs’ 1QFY2021 gross margin of about 44% signals that the company achieved a “respectable proportion” of self-branded product sales, but are still uncertain on the magnitude of mitigation this can provide against the overall decline in demand for PPE.
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Another positive for Medtecs is the company clinching supply contracts in the Philippines and Cambodia, “although the size and length of these contracts remain to be seen.” say Woon and Ling.
With an expected large cash pile of over US$100 million by end-FY2021, the analysts expect either a potential M&A, or a higher dividend payout for shareholders.
As at 12.05pm, Medtecs is trading at 97.5 cents, with an FY2021 price to book ratio of 1.7 and a dividend yield of 1.3%
