Brokers' Call: Memtech Limited

MEMTECH LIMITED

Broker: OCBC

Call: Hold

Target price: 48 Singapore cents

Memtech's second-quarter results for 2016 were below expectations due to a sharper-than-expected drop in telecommunication revenue.

In addition, cost of sales increased 4.6 per cent year on year despite the 5.8 per cent decline in total revenue. This was due to higher variable costs incurred for the Beats project, for which mass production was delayed to the second half of this year, and minimal revenue was recorded.

Going forward, we expect the second half to be better with the Beats contribution and resilience of auto revenue. Estimates for profit after tax and minority interest for the 2016 financial year have dropped from US$2.8 million (S$3.8 million) to US$1.2 million on revised forecasts.


MERMAID MARITIME

Broker: DBS Group Research

Call: Hold

Target price: 9 Singapore cents

While persistently low oil prices cloud the outlook for all offshore services players, Mermaid's relatively stress-free balance sheet with only 0.04 times net gearing, ability to profitably utilise key subsea vessels and recent cost-cutting initiatives provide some comfort.

The key risk remains the ability to take delivery of the three newbuild vessels on order, which have had their delivery dates deferred to end-2016/mid-2017, as Mermaid will need to secure financing for the approximately US$400 million (S$538 million) remaining capital expenditure commitments amid challenging market conditions.

Profits for the second half of 2016 were above expectations, with Mermaid reporting US$7.8 million in net profits, beating expectations of US$2 million in profits. Gross margins trended up to 23 per cent this quarter on the back of higher revenues, due to work secured for some key vessels and cost savings due to cold stacking of underutilised vessels and streamlining of crew expenses.

Factoring in the recent contracts and lower cost assumptions, US$12 million in profits are expected in financial year 2016.


ST ENGINEERING

Broker: DBS Group Research

Call: Buy

Target price: $3.55

ST Engineering remains a relatively defensive stock with a healthy balance sheet and secure dividend payouts amid tough market conditions.

Its aerospace segment has positioned itself well by investing in growth markets such as narrow-body aircraft passenger-to-freighter conversions, the Chinese maintainence, repair and operations market, and cabin interior solutions, to name a few.

The electronics segment should also benefit from the "smart city" trend, not only in Singapore but also in various overseas markets as well.

The $127 million net profit for the second half of 2016 was in line with expectations, though boosted by a one-off divestment gain of around $10million arising from the sale of a speciality vehicle subsidiary in China under the land systems division.

Earnings estimates for financial year 2016 have been lowered by 4 per cent to factor in the learning curve in the Airbus P2F programme over at EFW, as well as challenges in the land systems and marine segments.

However, investments in building capabilities in the aerospace division and continuing growth in electronics segment driven by smart city initiatives should help to ramp up earnings from financial year 2017 onwards.

A version of this article appeared in the print edition of The Straits Times on August 22, 2016, with the headline 'Brokers' Call'. Print Edition | Subscribe