• Strong recovery post restructuring
• Opportunities in automotive, CE space
• Upside from earnings and dividend growth ahead

Out of the Woods: Foray into automotive and consumer electronics industries has borne fruit

Memtech International is a precision engineering manufacturer that supplies plastic components in a variety of industries. Prior to 2013, Memtech mainly served the mobile phone industry through its keypad and touchscreen production. After venturing into the automotive and consumer electronics space in 2013, Memtech has gained significant headway – generating US$94.6m in revenue and US$5.9m in profit from these two industries alone in FY14. We are now confident of Memtech’s future growth opportunities in this space.

Key revenue streams in the pipeline; new order upside expected from customers

The management has mentioned plans from three key customers (Beats by Dr. Dre, Tesla, and Continental) to expand their portfolio of services with Memtech. Going forward, we expect further new order upside from both existing and new customers to contribute to Memtech’s growth. We forecast revenue to increase +4.8% YoY in FY15, +10.8% in FY16, and +0.7% in FY17.

Product mix and automation to steadily increase gross margins

As Memtech makes headway in supplying highprecision functional components to Tier 1 automotive suppliers, the new product mix is expected to contribute to a higher gross margin. Furthermore, automation efforts in its tooling and moulding processes are expected to contribute to margin improvements in the longer run. Gross margins are forecasted to be 17.1% in FY15, 17.3% in FY16, and 18.3% in FY17.

High dividend yield and potential value accretion

Memtech has been paying dividends consistently since listing, even during its loss-making years in 2012 and 2013. In addition, we note Memtech’s potential as takeover target at 0.61x NTA. Based on ample scope for earnings growth, an attractive valuation and an expected dividend yield of 5.9%, we initiate with a BUY rating at a fair value of S$0.158 and total return of 30.3%.

Source: OCBC Research - 25 Nov 2015