• 2Q results were below expectations
• 2H expected to be better on Beats, auto
• Fair value drops to S$0.48

2Q results affected by telco decline, Beats costs

Memtech's 2Q16 revenue dropped 5.8% YoY to US$31.4m on the back of lower revenue from the Telecommunication (telco) and Industrial & Medical segment. 2Q16 revenue contributed 22.5% of our full-year forecast, while 1H16 revenue contributed 46.2%. Importantly, cost of sales increased 4.6% YoY despite the decline in revenue. This was due to higher variable costs incurred for the Beats project, for which the production was delayed to 2H16 and minimal revenue was recorded.

The manpower and equipment set aside for Beats also resulted in capacity constraints, leading Memtech to depend more on the outsourcing of some processes than is usually necessary. Going forward, we expect the proportion of cost of sales against revenue to normalize. Overall, PATMI worsened from a profit of US$1.5m in 2Q15 to a loss of US$1.4m; this was below our expectations for a quarterly loss of ~US$0.1m.

Telco revenue decline is secular

Telco revenue declined 31.6% YoY during the quarter. Going forward, we expect 2H16 contribution to be less than that seen in 1H16 as well as lower margin band of ~5% to 8% for the segment. For the full-year, we expect telco revenue to drop 36.5% YoY.

2H to be better on Beats contribution, auto strength

We expect the contribution from two out of the four projects Memtech is working on with Beats to come up to approx. US$10m in 2H16. The auto segment contribution is also expected to be resilient. For 2Q, automotive revenue increased 5.2% to ~US$14.8m, though it fell ~7% on a QoQ basis, perhaps due to a smaller impact from the Chinese government’s tax stimulus last Sept.

We expect auto segment revenue to plateau on a QoQ basis for the rest of the year, while coming up 6.6% against FY15. Our FY16 PATMI estimate drops from US$2.8m to US$1.2m on our revised forecasts. Given the weak visibility on revenue growth and cost management, we find it more reasonable to apply our 11.1x PE against our blended 2H16/1H17 earnings figure. Our fair value decreases slightly from S$0.50 to S$0.48. Maintain HOLD.  

Source: OCBC Research - 17 Aug 2016