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The top and bottom line improvement definitely looks impressive. But question remain if such numbers are repeatable especially when the pandemic becomes less of a problem when a effective vaccine is in the market.
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29-11-2020, 03:50 PM
(This post was last modified: 29-11-2020, 03:52 PM by Sumeria.)
What to watch out for at Medtecs:
1. Coming Special General Meeting on 18 Dec to approve share purchase mandate, for up to 10% of the company's shares. Medtecs probably did not get such a mandate from shareholders previously because it was not cash rich. But recent months' surge in profits has brought in much cash, and hence this "sudden" meeting. After the meeting, if the company starts to buy back shares, especially in reasonably big quantities, investors may see that as a positive move showing the company's confidence in the value of Medtecs.
2. Full year results in Feb 2021 will of course see an exponential growth in net profit. CY19 net profit was only US$1.1m vs my expectation of CY20's US$120-130 million. Assuming US$125m net profit gives a EPS of about 30 Singapore cents. At current share price, stock is trading at a PE of just above 3X. Cash may also surge to US$40-50 million, giving it much ammunition for a special bonus dividend.
3. As the narrative of pandemic continues to hoard mainstream media, the need for vaccination worldwide will also mean continued need for PPEs. Moreover, the vaccines are quite untested on humans and their effectiveness on mutating viruses is not certain. It also appears that vaccines have to be given again and again, and vaccination is not a one-time exercise.
4. The narrative also appears to be one of "despite all those vaccines, we humans still need to continue wearing our masks and socially distance, for whatever reason". Until this narrative ends, the play on medical supplies should remain.
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Two other positives that might have already been partly priced in are:
1. Stock's inclusion in MSCI Small Cap Index after market closes on 30 Nov (ie, today). This may lead to some funds which track this index needing to own this counter (especially if it does some sudden surges like it does now and then) if they have not bought in yet. Ownership by a bigger pool of investors is usually positive.
2. Company's plan to seek SGX's approval for upgrade from Catalist to Mainboard. This is likely to be approved, looking at the company's stellar revenue and profitability, as well as its inclusion in the MSCI Small Cap Index. The approval may give another positive boost to Medtecs' share price.
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Medtecs' share price rise today is probably due to DBS' initiating report on the company, with a price target of $1.30. DBS expects profit margins to fall, but still well above pre-Covid days. Cash holdings expected to rise to about US$100 million, or 35% of market cap in one year's time. This gives opportunities for M&A as well as higher dividend payout. DBS expects a conservative 10% dividend payout for FY2021, which translates to about 1.9 Singapore cents.
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CEO Andrew Yang bought 500,000 shares in Medtecs today (22 Dec), increasing his holding to 1.5 million shares. Company also got consent last week for share purchase but it does not seem to have commenced buying yet.
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Medtecs announced today it has entered into a Letter of Intent with Enimmune Co (whose mother ADIM is listed on Taiwan Exchange), with intention to explore marketing of the latter's "Speedy Covid-19 Ag Rapid Test in the Phillipines.
ADIM is in a vaccine manufacturer.
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"We are also exploring the possibility of foraying into the renewable energy market to develop another growth driver and will provide further details to shareholders if and when these materialise."
From MEDTECS INTERNATIONAL CORPORATION LIMITED (Incorporated in Bermuda) Announcement on Selected Financial Information for the Nine Months Ended 30 September 2021 and FY2021 Outlook
Yet another example of Company management looking to venture into a totally unrelated & crowded business where they appear to have little to no edge. At least the recently announced JV with ACO to produce nitrile gloves is a venture into a market segment adjacent to PPE (albeit a very crowded, low margin space with entrenched players all expanding capacity).
A PPE producer venturing into renewable energy appears to be a prime example of "diworsification" to me.
I don't understand what competitive edge Medtecs is going to have in renewable energy. If management proceeds with this, it is likely to divert management attention from their core business & burn cash that was earned during the pandemic to build new capability in renewable energy.....cash that is probably better distributed as dividends to shareholders who can then invest in renewable energy companies if they so wish. I highly doubt existing shareholders invested in Medtecs on the premise that they were going into renewable energy.
Management is far better off focusing on their core business than chasing ephemeral "growth drivers" in unrelated industry segments. I had thought value was starting to emerge & that the recent sell down from exuberant levels was the result of shareholders looking past the extraordinary revenue, profit & FCF growth due to the pandemic and starting to focus on what sustainable revenue & FCF looked like post-pandemic. Evidently not.
With the recent announcement, I am no longer sure Medtecs management can be trusted to focus on their core business.....sigh.
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