• Memtech International (MTEC)’s 2Q18 core PATMI of US$1m was a miss against our/consensus expectations.
• Revenue grew 19% y-o-y 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 q-o-q 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$1.42 Target Price (10x FY19F P/E). MTEC offers 4-5% forecasted dividend yield and currently trades at 0.9x FY18F P/BV.

2Q18 a Miss; Dragged by Lower Margin and Higher Tax Rate

Memtech reported 2Q18 PATMI of US$2.1m, up 57.4% q-o-q but down 56.9% y-o-y. 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.

Memtech’s 1H18 US$2.8m core PATMI only formed 21% of our/consensus full-year numbers; we note that 2H is seasonally stronger.

Source: CGS-CIMB Research - 13 Aug 2018