■ Revenue grew 19% yoy in 2Q18, but GPM fell to 14.7% (2Q17: 17.3%) due to higher raw material costs, staff costs and more outsourcing of tooling work.
■ We expect qoq margin improvement in 3Q18F from better economies of scale.
■ Product pipeline boosted by new auto customer, medical device and military parts.
■ Maintain Add with lower EPS and S$1.43 TP (10x FY19F P/E). MTEC offers 4-5% forecasted dividend yield and currently trades at 0.9x FY18F P/BV. Read More
2Q18 a miss; dragged by lower margin and higher tax rate
MTEC reported 2Q18 PATMI of US$2.1m, up 57.4% qoq but down 56.9% yoy. Excluding one-off disposal gains and FX impact, its core PATMI would have been US$1.0m, missing our/consensus expectations due to weaker gross margins and higher tax expenses. 1H18’s US$2.8m core PATMI only formed 21% of our/consensus full-year numbers; we note that 2H is seasonally stronger.
Auto and industrial & medical led 19% topline growth
2Q18 topline increased 19.1% yoy, thanks to both automotive and industrial & medical segments. The 32.6% auto sales growth was underpinned by client acquisition and higher contribution from existing customers (Tesla, Kostal). Industrial & medical revenue surged 79.1% yoy on the back of product renewal by a major customer. Consumer electronics revenue was stable yoy in 2Q18 but should pick-up in 3Q18F from ramp-up of new products. Structural weakness in telco revenue remains.
Expect cost pressures to linger in the near term
The biggest earnings upset stemmed from MTEC’s gross margin decline of 2.6bp yoy in 2Q18, which the management blamed on
i) higher staff expenses,
ii) higher raw material costs and
iii) more outsourcing of tooling work.
MTEC faced lower productivity issues from the lack of a stable and skillful labour force, as well as c.10% price hike in plastic resin and silicone. We expect such cost pressures to linger in the near term, but margins could benefit qoq from better economies of scale in 3Q18F.
New projects in the pipeline for FY19F
MTEC continues to make gains in its customer base, including its first project from a large medical devices company and new components for military products. It also secured a major project for new Mercedes Benz, which should contribute from FY19F onwards. Management also shared that the multiple projects for a major US MNC, for which it has completed sizeable tooling work earlier, remain on track for production.
Key risks and catalysts
The company remains in a net cash position of US$23.8m (c.21% of market cap) and also recorded higher operating cashflow of US$9.7m in 1H18 (vs. 1H17’s US$4.7m). Escalating trade tensions and any order delay/cancellation could pose downside risks to our Add call. Potential catalysts are new project wins and positive corporate exercises.
We raise our FY18F revenue assumption slightly in anticipation of stronger 2H18 volumes, but cut our FY18-19F EPS by 3-5% on lower margin and higher effective tax rates. Maintain Add with a slightly lower TP of S$1.43, still pegged to industry average of 10x FY19F P/E. The stock now offers FY18-20F dividend yields of 4-5% and trades at 0.9x FY18F P/BV.
Source : CGSCIMB Research