• Automotive growth continues
• Lower CE contribution
• Expect recovery in 2H16

1Q16 earnings below expectations

Memtech posted weak 1Q16 results, below our expectations as well as consensus. Memtech's 1Q16 revenue of S$33.2m, 1.1% down YoY, made up 21.3% of our full-year forecast and 21.1% of consensus estimates. The increase in automotive sales was partially offset by a drop in telecommunication and consumer electronic sales.

We had previously forecasted a growth in consumer electronics sales for FY16 on the back of orders from new customers. PATMI fell sharply below our expectations, dropping 52.9% to S$0.6m. It made up only 7.0% of our full-year forecast and 6.3% of consensus estimates.

CE: Delayed order from major customer

Memtech announced that one of its major customers in the CE segment unexpectedly delayed the start of a project, a week before the scheduled launch, amidst pressure to cut supplier prices across the board. We believe this customer to be Beats by Dr. Dre, given the poor operational performance of Apple this past quarter.

Memtech notes that the order is currently back on track after price negotiation, and we are optimistic that it will come to fruition by the start of 2H16. While we continue to be concerned of a slowdown in the CE segment for 2016, automotive segment results continue to post strong growth.

FY16 earnings forecast revised downwards

While we expect Memtech to post stronger results YoY in 2H16 as the new orders get underway, we expect weak consumer sentiment to continue to affect the CE segment in 2Q16. We are also wary of potential cost-cutting and delays by other customers. As such, we adjust our FY16 forecasts downwards by 6.6% to US$145.8m for revenue and by 23.3% to US$6.2m for net profit.

Our forecasted dividend payout for FY16 is reduced to 3.0 S-cents, giving a dividend yield of 4.3% against the last closing price. We apply our FY16 forecast of 6.11 S cents in net earnings per share to an updated fair value PE ratio of 11.1x to arrive at a fair value of S$0.680. Maintain HOLD.

Source: OCBC Research - 3 May 2016