Memtech reported 9M15 revenue of US$104m (+4.4% yoy) and core net profit of US$4.3m (+0.2% yoy). Revenue and net profit for 9M15 formed 67% and 64% of our FY15F forecast; lower than expected on the hiccups in 1H. 3Q15 gross margins remained stable yoy, but was lower qoq on higher consumer electronics sales mix. 3Q15 did better qoq with the resumption of some orders from automotive customers and the ramp up in production for consumer electronics products, from customers such as Amazon, in preparation for the year‐end shopping season. We are expecting 4Q15 and FY16F to continue to do well and keep our estimates unchanged.
Actively courting new customers and projects
Memtech has been busy courting new customers, even when many of their existing projects for automotive customers are still at the early stage of their product cycle. Over the past few months, Memtech has won new customers such as “Beats by Dr. Dre” (the best selling headphones brand and now owned by Apple), for components meant for a next generation headphone product that should launch in the first half of next year. It also managed to land 10 new projects from Continental, by replacing a supplier of the German auto parts maker. We also understand that Memtech is also undergoing a qualification process to become a supplier to another new customer that is in the midst of setting up a production base in China. This customer does not operate in the same industry as any of Memtech’s existing customers.
Stronger performance in the coming years
We still like Memtech’s exposure to the automotive supply chain (despite weakness in 2/3Q; we see stabilization in 4Q). We still believe its FY14 turnaround in results is just the beginning of a multi‐year sequence and peak years are expected to be in 2016/17 given the longer/more resilient nature of automotive project cycles. We also like its diversified customer exposure to different industries. Management has the mandate and financial capability to repurchase up to 10% of total issued ordinary Memtech shares (excluding treasury shares). It concluded share buyback of 1.5m shares in total on 21 Aug and 27 Aug, reducing its share capital and increasing FY15-17F EPS slightly by 0.1-0.2%. The buyback demonstrates management’s confidence in the company and provides support to the share price.
Maintain BUY; higher TP of S$0.156
We make no changes to our current estimates, but decrease our target P/E valuation to 9x from 11x, as we roll over our EPS base to FY16F from FY15F, to derive a new target price of S$0.156. We believe the recent pullback in Memtech’s stock price came as a result of the weakness seen in Chinese auto sales and the economy in general, however, we believe things should get better from here on. (Read Report)
Source : KGI Fraser Research