• Medtecs International's FY20 revenue (+480.4%) and earnings (+11-fold) were in line with expectations.
• PPE demand in 1H21 holding steady vs 1H21 with selling prices only inching down.
• On the lookout for expansion opportunities including M&A.
• Maintain BUY with a slightly lower target price of S$1.25.

Medtecs' FY20 Revenue and Earnings in Line

• Medtecs International (SGX:546)'s FY20 revenue and net profit climbed to US$400.3m (+480.4% y-o-y) and US$131.7m (+11,348.5% y-o-y) respectively as the COVID-19 pandemic drove demand for Medtecs International’s personal protective equipment (PPE).
• Gross profit margins were up 27.6ppts to 42.9%, supported by a higher proportion of sales of Medtecs-branded products.
• Final dividend of US$0.0418 per share declared, bringing total FY20 dividend to US$0.0503 or S$0.067 per share. The dividend represents ~7% yield based on the last Medtecs International’s closing price of S$0.955.

Manufacturing and Trading & Distribution Segments Shine

• The Manufacturing segment saw FY20 revenue rise by 576.4% y-o-y to US$357.8m. Profit before tax margins stood at 34.2% for FY20, an increase from 2.5% in FY19.
• The Trading & Distribution segment reversed its fortunes and saw FY20 profit before tax rising to US$14.0m from US$0.3m in FY19 driven by higher demand and sales of higher margin products.
• Hospital Services’ losses before taxes deepened to US$1.4m in FY20 from US$0.1m the previous year as a result of higher labour and linen amortization cost.

Market Was Expecting a Special Dividend

• Following special dividend announcements by peers such as Riverstone (SGX:AP4) and UG Healthcare (SGX:8K7), Medtecs International’s lack of a special dividend may have disappointed the market.
• Medtecs International's total dividend for FY20 stood at US$0.0503 per share, representing a payout ratio of 21.0%.
• For comparison, Riverstone had a payout ratio of ~50%. A 50% payout ratio at Medtecs International translates to a dividend of US$0.1199 (S$0.1597), representing a yield of 14.5% based on Medtecs International’s pre-announcement closing price of S$1.10 on 26 Feb 2021.
• On this front, we believe Medtecs International is looking to conserve cash to expand into new product lines or pursue M&As
• While success for Medtecs International’s expansion is not guaranteed, we believe this is important for the long-term sustainability of the group.

Demand in 1H21 Looks Stable

• We believe the market will focus on the potential impact the improving pandemic situation may have on performance in FY21F.
• We think a better performance across all segments is likely on a y-o-y basis with 1H21 looking stable compared to 2H20.
• Optimistically, Apron, Gown and Coverall and Face Mask deliveries in ASP of PPE, while having inched down by an estimated 2-3% from 4Q20, remain healthy leading to our overall view of a stable 1H21.

Maintain BUY on Medtecs International

• Maintain BUY on Medtecs International with slightly lower target price of S$1.25 (Bear case: S$0.77, Bull case: S$1.60) based on pre-COVID low P/E of 9.5x on blended FY21/22F earnings.
• Our target price was revised down as we adjusted our base case assumptions for the Hospital Services and Trading & Distribution segments which were slightly too optimistic. This was also the reason behind our marginal 4% downward revision in FY21F earnings.

Source: DBS Research - 3 Mar 2021