• Medtecs International's 1Q21 performance missed expectations; revenue down ~63% q-o-q.
• Gross margin of ~44% despite volume decline may indicate that the decline in ASP is bottoming.
• Longer-term earnings sustainability in focus.
• Downgrade to HOLD with lower target price.

Medtecs International's 1Q21 Performance Disappoints

• Medtecs International (SGX:546)'s 1Q21 revenue came in at US$42.2m (+5.9% y-o-y, -62.7% q-o-q), below expectations. 1Q21 earnings followed the same trend at US$13.2m (+259.9% y-o-y, -71.9% q-o-q)
• While no reason was provided yet for the decline in performance, we opine that a few risk factors may have played out including a quicker pace of vaccination which has led to lower COVID-19 cases in key geographies and a loss of market share to domestic suppliers.
• Medtecs International also announced that it has started site selection for the construction of a personal protective equipment manufacturing facility.
• A bright spot was Medtecs International’s gross margin of ~44%, possibly signalling that the proportion of self-branded product sales remained respectable.
• Another positive was clinching supply contracts in the Philippines and Cambodia, although the size and length of these contracts remain to be seen.

COVID-19 Situation Update

• Vaccination progress in key geographies including the UK, Germany and Singapore are progressing well at ~39%, ~18% and ~19% of population already fully vaccinated*. However, the Philippines and Cambodia, where Medtecs International has manufacturing operations in, have seen a surge in COVID-19 cases in recent weeks although the Philippines appears to be past the peak.

England aprons, gowns and coveralls (AGC) usage was stable in the UK; face mask trended higher.

• Deliveries of AGCs were stable in England in the loss of market share to domestic PPE suppliers. Indeed, the UK was reported to be targeting for 70% of expected PPE demand to be met by domestic production by December 2020.

Downgrade Medtecs to HOLD With a Lower Target Price

• Our bear case for a much lower sales volume appears to have played out and we have accordingly reduced Medtecs International's valuation timeframe and our valuation is now based on 10.0x (Medtecs International’s pre-COVID low P/E) FY22F earnings to reflect the declining earnings trend.

Medtecs' large cash pile still hints at potential M&A or higher dividend.

• We forecast that Medtecs International could accumulate a cash pile of well over US$100m by end-FY21F, potentially fueling the group’s M&A efforts or be paid out as dividends.

Source: DBS Research - 7 May 2021