Disappointing 3Q15 results despite robust 23.8% YoY topline growth – NPAT fell 27.6% YoY, mainly on a 94.8% rise in R&D costs to USD1.8m and a USD600,000 loss from a subsidiary. Downgrade to NEUTRAL with a SGD0.31 TP (from SGD0.52, 3% downside) as we cut FY15F/FY16F NPAT by 40%/38% to factor in higher R&D costs. Together with OSIM, Trek is trying to advance into the medical technology segment.
■ Dragged down by higher research & development (R&D) costs
Trek 2000 International’s (Trek) 3Q15 results were a letdown, mainly due to a 94.8% rise in R&D costs to USD1.8m. Coupled with a USD600,000 loss from subsidiary Racer Group, this caused 3Q15 NPAT to decline by 27.6% to USD550,000 despite revenue surging 23.8% YoY to USD44m. The revenue surge was mainly due to a 25% YoY increase in Trek’s interactive consumer solutions segment, which consists of the sales of its Flucard and Wifi memory modules. In addition, GPM increased slightly to 8.7% (from 8.5%).
■ R&D initiatives in the medical technology segment
Back in June, Trek gained OSIM International (OSIM) (OSIM SP, NEUTRAL, TP: SGD1.50) as a strategic partner in the medical technology segment. OSIM invested a SGD10m equity stake in the company to fund its ongoing R&D expenses. To date, an increase in R&D initiatives has resulted in the filing of three new patents and further developments in the medical technology segment. This increases the groups portfolio of 436 patents granted worldwide.
■ Downgrade to NEUTRAL with a SGD0.31 TP
Trek’s FY15 has been fairly disappointing. It has simply gone off track partially due to lower margins from the group’s interactive consumer solutions business segment as well as higher R&D expenses. Going forward, it is likely for such high R&D expenses to continue as the company is currently collaborating with partners on the development and commercialisation of various products within varied spaces. In addition, Trek has also not announced any new contract wins or continued orders from Rely/Mattel China or other customers to date. As a result, we have lowered our FY15 and FY16 NPAT estimates by 40% and 38% respectively and downgraded our call to NEUTRAL from Buy with a lower of SGD0.31 TP (from SGD0.52), based on 20x FY15F P/E. (Read Report)
Source : RHB Research