• Beats projects coming on stream
• Current price levels attractive
• Fair value increases to S$0.76

Memtech “Beats” our expectations

We were overly bearish on Memtech’s growth potential following its surprise US$1.4m loss last quarter. Memtech solidly beat our expectations in 3Q16, with revenue jumping 25.3% YoY to US$46.5m on the back of a ~59% jump in contributions from Consumer Electronics (CE) as Memtech started production of its first Beats project. In addition, the group clocked in QoQ improvement in its other three segments.

We were particularly encouraged by the QoQ increase in Telco; the segment had suffered a 31.6% YoY drop in revenue last quarter. 3Q gross profit increased 43.9% to US$8.2m as margins increased from 15.4% to 17.7%, while 3Q net profit increased 90.2% YoY to US$3.1m. 9M16 revenue came up to 80.9% of our full-year forecast while 9M16 net profit of US$2.3m far exceeded our FY16 forecast of US$1.2m.

Revving up the engines

With manufacturing for the second Beats project having started this month and the prospect of more projects coming on stream next year, we are optimistic of the continued growth in CE. Furthermore, management remains positive about the medium term (three to five year) outlook for the Auto segment. Given the importance of the automobile market in sustaining China’s GDP growth targets, we agree with them that it would be in the Chinese government’s interests to support the industry’s growth.

Upgrade to BUY

Key risks going forward include sudden drops in CE or Telco contributions, as these segments may be subject to project delays as well as sudden cost-cutting measures. While we see further upside from one potentially large Beats project in negotiation as well as ~5% to ~15% automotive growth in China over the next year, we have refrained from factoring those sources of growth into our model given macroeconomic uncertainties (see exhibits for our segmental growth forecasts).

Even so, applying our new FY17 EPS forecasts against an 11.1x PE, as well as a 7% discount for currency risk, increases our fair value from S$0.48 to S$0.76. Current price levels look attractive and our fwd FY17 dividend yield stands at 6.1%. Upgrade from Hold to BUY.

Source: OCBC Research - 14 Nov 2016