SINGAPORE (May 2): UOB Kay Hian is keeping its “hold” call on components solution provider Memtech International and cutting its target price to $1.32, from $1.50 previously.
This comes amid a significant de-rating of most contract manufacturers (CM) and plastic injection moulders (PIM) over the last few days, according to analyst Nicholas Leow.
“We expect sentiment in share prices of CM and PIM to remain weak, given that some peers have missed consensus earnings estimates,” Leow says in a report on Friday.
Memtech saw its earnings fall 16.3% to US$1.3 million ($1.7 million) in the 1Q18 ended March.
Revenue rose 14.2% to US$41.6 million during the quarter, driven by growth in the group’s Automotive and Industrial & Medical segments.
See: Memtech reports 16.3% fall in 1Q earnings to $1.7 mil on lower margins and bigger forex losses
Memtech’s automotive segment clocked a surprising 25.5% growth in sales to US$22.6 million in 1Q18, while revenue from the industrial and medical segment more than doubled to US$3.7 million. Meanwhile, sales from its consumer electronics segment fell 5.3%.
“1Q and 2Q are typically weaker quarters for the company as consumer electronics ramp-up happens in the second half of the year in preparation for the holiday seasonal demand,” says Leow. “The anticipated ramp-up in 2H18 coupled with the strong automotive sales growth momentum gives us confidence that the company is on track to meeting our earnings estimates.”
Leow opines that Memtech’s strong position in electric vehicle (EV) production – where it serves customers such as Tesla and Nio – should bear fruit in 2019.
“Carmakers from Volkswagen AG to Ford are all trying to ramp up their EV production in China. This trend bodes well for Memtech in the longer term as it has a strong positioning in the manufacturing of EV plastic components which could potentially open new opportunities for the company with global automakers,” he says.
At the same time, Leow believes Memtech’s healthcare and industrial segment could continue to ramp up.
“We understand the group is in discussions with a few new potential major medical customers, and this could be a new growth driver come 2019,” he says.
As such, Leow finds Memtech to be fairly valued at current levels, and recommends an entry price at $1.18.
As at 3.48pm, shares of Memtech are trading 4 cents down, or $3.0% lower, at $1.30. This implies an estimated price-to-earnings ratio of 10.4 times and a dividend yield of 3.6% for FY18.
