SINGAPORE (Apr 27): CIMB is maintaining Memtech International at “add” as it continues to like the stock for its double-digit earnings growth, 4% dividend yield, balance sheet strength and customer diversification efforts.
In a Thursday report, CIMB Ngoh Yi Sin sees potential in its industrial & medical segment, which saw 103% y-o-y sales growth thanks to the launch of a new series of IoT-enabled, handheld scanner, and possibly adding radio communication devices to its product portfolio.
To recap, Memtech posted 1Q18 net profit of US$1.3 million ($1.7 million), which was 16% lower than 1Q17 and formed 10% of CIMB’s and consensus full-year forecasts. Excluding US$0.5 million forex loss, core net profit would have improved 8% y-o-y to US$1.8 million, deemed in line as the house forecasts a seasonally stronger 2H18.
See: Memtech reports 16.3% fall in 1Q earnings to $1.7 mil on lower margins and bigger forex losses
1Q18 revenue and core net profit historically account for 22% and 12% of Memtech’s full-year numbers, respectively. A lower gross margin of 14.5% from 18.1% in 1Q17, from temporary labour shortage and resource allocation, offset the 14% y-o-y sales growth.
Automotive sales outperformed in 1Q18, up 26% y-o-y thanks to increasing sales from existing customers like Kostal, Continental and Tesla, which now account for 5% of Memtech’s overall topline, based on our estimates.
CIMB attributes the slight decline in Memtech’s consumer electronics (CE) revenue to a focus shift towards higher-margin parts, lower consumer demand due to product lines refresh and resource allocation to prepare for mass production in 2H18 for a leading CE player.
“With most of its existing projects still midway through their lifecycle, and new customer wins such as LG automotive and BYD Auto, we expect to see progressive growth from the auto segment,” says Ngoh.
Despite higher capex requirements of US$3.8 million in 1Q18 to cater for new projects, Memtech is in a strong net cash position, which makes up about 20% of its market cap.
With the order pipeline still intact, CIMB is retaining its FY18-20 assumptions but lowering its target price to $1.47 based on 10 times FY19 earnings on the back of sector de-rating, on par with industry average.
As at 12.01pm, shares in Memtech are trading at $1.29 at 10.9 times FY18 earnings, slightly below peers’ average of 11.3 times and offering a decent forecast yield of 4.1-4.8% in FY18-20.
