Memtech

Memtech ($0.108): A stock that has been gaining traction among investors, but has yet to receive any coverage. We review the results and see potential for more upside.

Memtech is principally a customized components manufacturer of consumer electronics and automotive sector.

In FY12, it disposed of its loss-making business in Huzhou and in FY13, it made the strategic move to diversify its product range into precision and decorative rubber and plastic parts for automotive, highly decorative parts for consumer digital products, and modular components for niche industrial and medical sectors.

Following the transformation, the company turned quarterly profitable in 3Q13 and has been operationally strong since then.

FY14 raked in US$17.2m profits (vs US$4.4m losses in FY13) on US$137.6m (+18.0% y/y) revenue and 1.9pp higher gross margins despite reclassification of packaging cost into cost of sales, resulting from more profitable product mix.

Operationally, the company has stabilized post-transition. Core profit excluding liquidation and disposal gains and impairments was US$6.2m (vs US$3.5m losses in FY13).

Memtech is not a new kid on the block. It has solid long-standing relationships with major international names such as Huawei, Lenovo, Samsung and Netgear in the consumer electronics space. In its newer automotive segment, it supplies to global automotive parts suppliers such as Germany’s Hella and KOSTAL, Canada’s Magna, America’s Lear and Japan’s Denso. Most recently, it is also working directly with car manufacturers Volkswagen, General Motors and Tesla.

Its latest 2013 Annual Report states it has three manufacturing sites in China: Dongguan in Guangdong Province, Kunshan and Nantong in Jiangsu Province.

Memtech has strong financials, with net cash position of US$29.1m, inventory turnover of 9.9x, and ROE way above peers at 15.3%

Given that the company’s earnings have stabilized, valuation looks undemanding as the company trades at a big discount of 8.8x core trailing P/E while its bigger peers trade around 15x P/E.