SI Research: Is Memtech International A Bargain Stock?

The share price of Singapore-based electronics components manufacturer Memtech International (Memtech) fell roughly 44.5 percent from its peak of $1.91, which it touched in mid-March last year. Its share price has been battered in 2018 as investors were cautious about the impact of the ongoing US-China trade war as Memtech has all of its three manufacturing sites located in China.

On the back of a possible trade solution, shares of Memtech have risen to $1.06 from 2 January 2019 to register a year-to-date return of 35.9 percent as at 11 March 2019. On top of that, Memtech delivered a mixed earnings performance in the latest results. Is it a sign of bottoming out and a great buying opportunity?

The Business

Memtech provides solutions to customers through four segments, namely Automotive Components, Industrial & Medical, Mobile Communications and Consumer Digital devices. Memtech’s customers include major automotive supplier Hella, Magna, Lear, Denso and Kostal. Other than that, Memtech also serves major car manufacturers including Volkswagen and General Motors; leading electric vehicle companies including Tesla and Nio; leading manufacturers including Foxconn and Celestica; along with some renowned brands such as Amazon, Huawei, Lenovo, Samsung and Netgear.

Financial Performance

US$’ million	FY18	FY17	FY16	FY15	FY14
Revenue	192.5	170.0	159.0	142.2	137.6
Gross Profit	31.2	30.9	25.4	24.8	24.0
Net Profit	9.6	14.1	6.3	8.1	17.2
Gross Margin	16.2%	18.2%	16.0%	17.5%	17.5%
Net Margin	5.0%	8.3%	3.9%	5.7%	12.5%

(Source: Shares Investment)

Despite trade war tensions and a more conservative market sentiment, Memtech generated a record revenue of US$192.5 million in FY18, an increase of 13.2 percent compared to a year ago. The topline growth was supported by higher revenue from Automotive segment and Industrial & Medical segment as new projects entered into mass production. In the meantime, the growth of Consumer Electronics segment was boosted by new projects from a key multinational US customer and existing key customers.

However, gross profit grew 0.8 percent to US$31.2 million as gross margin declined two percentage points to 16.2 percent. The gross margin contraction was due to rising labour costs, higher costs of raw materials and increasing costs to meet new environmental standards.

Meanwhile, sales & marketing expenses and general & administration expenses jumped 15.7 percent and 13.9 percent to US$9.3 million and US$12.9 million to further weigh on the bottom line. Overall, net profit slumped 32 percent to US$9.6 million as a result of rising production and start-up costs for new projects.

Going forward, FY19 would be a better year for Memtech on new project wins and a boost from several major projects delayed in FY18. The main growth driver would be Consumer Electronics segment as there is an increase in the demand for electric vehicles and Internet of Things (IOT) applications such as smart home devices and audio-related products. However, there might be rising headwinds from slowing auto sales and ongoing trade negotiations. Meanwhile, we could expect a gradual improvement in gross margin in FY19 as projects enter the ramp-up phase with a higher utilisation rates.

Sound Financial Position

Memtech’s financial health has improved as it pared down on its debt. Total borrowings have declined from US$4.8 million as at 31 December 2017 to US$3.5 million as at 31 December 2018. Meanwhile, the cash and cash equivalents also declined from US$34.9 million to US$22.2 million primarily due to the repayment of loans and borrowings, dividend payout as well as payment for capital expenditure. Even though the net cash position is lower at US$18.7 million, however, it is equivalent to 17.1 percent of its market capitalization as per its closing price of $1.06 on 11 March 2019. Total debt-to equity has fallen from 3.8 percent to 2.8 percent.

Undemanding Valuations

	Closing Price ($)	EPS (US$)	P/E Ratio	P/E ex-cash	NAV (US$)	P/B Ratio	Dividend ($)	Dividend Yield (%)
FY18 (11 March 2019)	1.06	0.07	11.38	9.95	0.90	0.87	0.03	2.8%
FY17 (09 March 2018)	1.76	0.10	12.85	11.28	0.91	1.43	0.055	3.1%

At $1.06 per share, Memtech is currently trading at 11.4 times earnings and 0.87 times to book value. However, stripping away net cash from its share price, price-earnings ratio (P/E) ex-cash would be only at 10 times, lower than 11.3 times a year ago.

Comparatively, we observe that the current valuation appears to be undemanding whether in terms of P/E ex-cash or P/B. That said, Memtech has been focusing on improving earnings quality through the gradual elimination of lower-margin processes by investing in automation to enhance its competitive edge. However, investors should only expect to be decently rewarded in the long-term.