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3 Small Cap Manufacturers With Resilient Business Models

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For the past quarters, manufacturers have been enjoying a boom in investors’ demand as Singapore’s economy recovers. But ever since US President Trump started his trade war rhetoric against China, manufacturers have fallen out of favour.

Trade War, Rising Labour Costs And Rising Raw Material Costs Among Headwinds For Manufacturers

The concern was largely surrounding the impact of the trade war on global trade and global economic growth. As businesses turn more cautious on increasing risks of trade tensions, some of the manufacturers are facing pricing pressure from their customers. Some customers have even delayed orders to wait for a recovery in consumers’ sentiment.

Apart from worries of the macro economic environment, there are also challenges within the manufacturing sector. Rising labour costs, especially for plants in China, is one of them.  Higher crude oil prices in 1H18 have also led to rising costs of raw materials and utilities.

Investors Takeaway: Are Small Cap Manufacturers Going To Boom Or Doom?

With headwinds against the manufacturing sector, should investors still carve out a portion of their portfolio to include small cap manufacturers? Well, according to UOBKH, long-term prospects of small cap manufacturers remain strong despite the near-term headwinds. Small cap manufacturers like Valuetronics Holdings (Valuetronics), Sunningdale Tech (Sunningdale) and Memtech International (Memtech) remain confident in securing more orders, especially in the consumer electronics and automobile segments.

  1. Valuetronics

Among the small cap manufacturers listed in Singapore, Valuetronics is UOBKH’s top pick. Although Valuetronics’ 2Q19 net profit declined 13 percent year-on-year, UOBKH noted that this is due to a one-off flood provision. The temporary disruption from the flood led to a fall in the consumer electronics segment.

On the other hand, growth momentum at its industrial and commercial electronics segment remained robust at 21 percent year-on-year. Stripping away the one-off provision, Valuetronics’ net profit would have increased 14 percent year-on-year.

UOBKH highlights that Valuetronics’ valuation remains attractive at 2.2 times FY19 EV/EBITDA and FY19 ex-cash PE of 3.3 times. Following recent quarters, Valuetronics’ net cash continued to increase to $152.7 million, which constitutes 55 percent of its market cap.

BUY, TP $0.87; Current share price $0.69

  1. Sunningdale

Sunningdale is one of the two small cap manufactures that UOBKH has recommended a HOLD call following its 3Q18 results. This is despite UOBKH’s confidence in Sunningdale’s business over the long term. During its 3Q18, Sunningdale reported that its 3Q18 core net profit which declined 52 percent year-on-year due to gross margin compression. Sunningdale missed UOBKH’s 3Q18 forecast and fell short of the year-to-date estimate for 9M18.

Although Sunningdale is confident of its resilient and diversified business model, the management is cautious of headwinds from rising production costs and the trade war. Thus, moving forward, UOBKH will cut its FY18-20 EPS forecast for Sunningdale by 14-18 percent. UOBKH notes that if Sunningdale’s share price falls to $1.25, it will be a good entry price.

HOLD, TP$1.50; Current share price $1.46

  1. Memtech

Similar to Sunningdale, Memtech also fell short of market expectations as it reported its 3Q18 results. Memtech’s 3Q18 net profit fell 19 percent year-on-year as gross margin was compressed. According to Memtech, gross margin was compressed due to rising input costs and project delays at several key customers. So far, Memtech’s 9M18 net profit met only 64 percent of UOBKH’s full-year estimate. Moving forward, Memtech is optimistic of a better 2019 on a healthy pipeline of new projects.

HOLD, TP$0.91; Current share price $0.805

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