SINGAPORE (Feb 28): CGS-CIMB is downgrading its recommendation on Memtech International to “hold” from “add” with a slightly lowered target price of $1.08 from $1.10 previously.

The group yesterday announced that its FY18 earnings have declined by 32% y-o-y to US$9.6 million ($12.9 million), despite a 13.2% increase in revenue to US$19.2 million.

See: Memtech reports 32% decline in FY18 earnings to US$9.6 mil

In 4Q18, the group recorded a 5.1% y-o-y topline growth due to a seasonally-stronger quarter. But it did not manage to offset the decline in gross margins to 17.7% from 18.8% in 4Q17 and higher operating costs.

The drop in gross margins are mainly due to rising labour costs, higher raw material prices and product packaging costs, increased depreciation costs for new equipment, additional costs to meet new environmental standards and lower manufacturing yield for some new projects.

This resulted in a 21% y-o-y drop in 4Q18 core earnings to US$3.2 million.

In a Thursday report, analyst Ngoh Yi Sin says, “We expect a gradual improvement in FY19F as these projects enter the ramp-up phase, boosting core earnings by 35%.”

Growth in the group’s FY18 revenue was mainly attributed to an 18.9% y-o-y increase in revenue from its automotive segment, 16.5% increase in consumer electronics segment, and 15.0% increase in industrial & medical segment. This was partially offset by a 20.2% y-o-y drop in the group’s telco business.

“Going forward, we think the global slowdown in car sales and limited order visibility from its major MNC customer could weigh on its auto and CE segments, respectively, in the nearterm. But we remain positive on the stronger ramp-up of industrial & medical projects, and higher demand from its acoustic customers,” says Ngoh.

As at 3.15pm, shares in Memtech are trading 6.31% lower at 96 cents or 0.8 times FY19 book with a dividend yield of 4.2%.