DBS rates Medtecs a 'buy' on expected high margins even after pandemic

Singapore

DBS Group Research expects Medtecs International Corp to sustain its high gross margins after the Covid-19 outbreak, led by a transition to self-branded product sales.

The research team on Tuesday initiated coverage on the personal protective equipment (PPE) maker with a "buy" call and a target price of S$1.30.

Medtecs shares jumped as much as 13.8 per cent or $0.125 to hit S$1.03 as at 3.02pm on Tuesday. The counter closed at S$1.00, up 10.5 per cent or S$0.095, with 25 million shares changing hands.

Although the demand for PPE and the average sale price (ASP) will inevitably decline as the Covid-19 situation improves, the DBS research team expects Medtecs' ASP and sale volumes to stay 90 per cent and 60 per cent above pre-pandemic levels respectively.

This will likely be boosted by a bigger proportion of sales of Medtecs-branded products as well as new customer relationships formed during the coronavirus outbreak, to mitigate the lower post-pandemic demand, said DBS.

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Therefore, its 2022 earnings may surge to 28.6 times that of 2019's, noted analysts Yong Woon Bing and Ling Lee Keng.

They added that Medtecs' stock is trading at an "attractive" value, with a 6.8-time blended 2021/2022 price-to-earnings (P/E) ratio. The company's cash holdings also possibly form about 35 per cent of its market capitalisation by the end of 2021.

Moreover, from multiple valuation angles, the counter is trading at a discount. It is valued below both its five-year mean forward P/E of 10.8 times and two-year pre-Covid-19 mean P/E of 19.2 times, and also trades at a discount to the five-year peer average forward P/E of about 16 times.

DBS estimates Medtecs could generate a cash pile of "well over" US$100 million by the end of next year.

This could catalyse the group's merger and acquisition efforts in a post-pandemic world, Mr Yong and Ms Ling wrote. Alternatively, with the large cash pile, Medtecs could reinstate its previous dividend policy of paying out around 25-50 per cent of its earnings, the analysts added.

That being said, they have assumed a conservative 10 per cent payout ratio from next year, representing about 2 per cent yield for 2021 or a dividend per share of 1.89 Singapore cents.

Separately, Medtecs on Monday announced it is partnering its supplier Mytrex Health Technologies to explore opportunities to co-locate production plants in Taiwan, the Philippines, the US and other regions. This is to vertically integrate PPE production operations, Medtecs said.

DBS's report is prepared under the Research Talent Development Grant Scheme, under which the Monetary Authority of Singapore provides co-funding to groom research talent to initiate research coverage primarily of mid to small-cap Singapore-listed companies.