SINGAPORE (April 25): UOB Kay Hian is initiating coverage on components solution provider Memtech International with a “buy” and a target price of $1.05.

“Companies operating in the precision engineering space experienced a sector re-rating over the last few months, driven by stronger 2H16 results and M&A interest,” says UOB analyst Nicholas Leow in a retail report on Tuesday.

Memtech, however, remains of the sector laggards.

Calling it an “under-appreciated gem”, Leow says Memtech’s strong balance sheet, consistent dividend track record, and potentially strong 2017 performance could mean a bigger dividend for shareholders this year.

According to Leow, Memtech could potentially pay a dividend of 3.5 cents in 2017, translating into a 4.4% yield – “with possibility of more”.

The company has an official dividend policy of paying out 30% of earnings, but has paid out closer to 40% of core earnings over the last two financial years, Leow says. In addition, Memtech has not missed a dividend payment over the last decade.

While results in first half of last year were slowed by a delay in production for the Beats by Dre headphones, the analyst expects a year-on-year turnaround in 1H17.

“We expect Memtech to sustain its earnings momentum from 2H16 into 2017, driven by new project wins and larger orders from existing automotive customers,” says Leow.

According to Leow, Memtech is trading at a “compelling” FY17F PE of 8.6x.

“In a sanity check, Memtech’s FY17F P/B multiple is a meagre 0.7x with an expected FY17 ROE of 8.2%,” says Leow. “We do not think that Memtech deserves to be trading at such a substantial discount to its peers.”

In addition, Leow opines that Memtech could be a potential M&A target, which would likely see further upside to its target price.

“M&A remains a distinct possibility given Memtech’s large exposure to the automotive sector, strong balance sheet, good operating cash flow, clean capital structure and 50% of the shares held by management and insiders,” says Leow.

As at 3pm, shares of Memtech International are trading 5 cents higher at 84 cents.