Weekly Penny Stock Pick for October 2, 2018

SMTC Corporation (Symbol: SMTX), incorporated on July 31, 1998, is a provider of electronics manufacturing services. SMTX's manufacturing services include product design and sustaining engineering services, printed circuit board assembly, production, enclosure fabrication, systems integration and testing services, configuration to order, build to order and direct order fulfillment. SMTX's geographic segments include the United States, Mexico and China. SMTX offers integrated contract manufacturing services to global original equipment manufacturers and technology companies primarily within the industrial, networking and computing, communications and medical market sectors.

SMTX offers approximately three vertically integrated manufacturing streams, such as enclosures and precision metal fabrication products, PCBA products and larger-scale systems. For each of these streams, SMTX provides a range of manufacturing services, from assembly, test, integration and box-build through to system level test, configure-to-order and end customer order fulfillment. Its integrated manufacturing services include PCBA Services; System-Level Integration, Box-Build and Test; Enclosures and Precision Metal Fabrication; Custom Interconnect; Engineering Services; Global Procurement and Supply Chain Network, and Management Methods and Tools.

PCBA Services

SMTX provides product assembly and system level integration and test services combined with manufacturing equipment and processes. PCBA Services allow SMTX to support low, medium and high mix and volume manufacturing requirement, as well as deliver a final product directly to the end customer.

System-Level Integration, Box-Build and Test

SMTX's system and subsystem assembly services involve combining a range of subassemblies, including PCBAs, cables and harnesses, battery boxes and connector blocks, power supplies, backplanes and thermal controls. SMTX's test encompasses an array of technologies in system-level products, including high-speed digital, radio frequency, precision analog, power, thermal and optical. It provides electrical and mechanical testing for cables, harnesses, PCBAs, subassemblies and systems to meet its customers' requirements and specifications.

Enclosures and Precision Metal Fabrication

SMTX uses grade sheet steel, stainless steel and aluminum. SMTX's equipment and processes enable SMTX to produce medium to complex product enclosures and metal parts.

Custom Interconnect

SMTX engages in the design, development and manufacturing of interconnect assemblies. These assemblies include optical and electrical cable, and harness assemblies.

Engineering Services

SMTX provides services across the entire product life cycle, including product design. SMTX provides product design through its partner, prototyping, qualification testing and sustaining engineering through product end of life.

Global Procurement and Supply Chain Network

Global Procurement includes outsourcing based on market conditions and demand management criteria established with the customer. SMTX's supply chain management team is responsible for all aspects of SMTX's supply network.

Management Methods and Tools

SMTX has a Web-based system, through which it can communicate, collaborate and plan throughout the entire supply chain in real-time with its customers and suppliers. SMTX employs quality assurance systems and manufacturing process planning.

New Supply Chain Center

Last month, SMTX announced the opening of its supply chain center in Phoenix, AZ as one of several key initiatives in SMTX’s ongoing

drive to deliver “best-in-class” vertically integrated supply chain services in support of its expanding base of customers and strong year-over-year growth opportunities.

“While supply chain challenges reported by many of our peers continue to affect the industry, SMTC’s focus on supply chain excellence and the emphasis we have placed on this very important part of the business continues to provide exceptional results for our customers in these unprecedented times,” stated Ed Smith, SMTC president and CEO. “Under the direction of our recently hired SVP of Global Planning and Supply Chain Phil Wehrli, we have worked with our customers and key partners to rethink our approach and implement a number of initiatives to manage the risks associated with component shortages and new tariffs. These initiatives, including the new center in Phoenix, span the use of lean manufacturing kan-ban programs, upgraded quoting-tools, tailor-made customer-specific action plans, new agreements with Tier-1 distributors, and extensive investments in safety stock programs, and optimizing our domestic and global integrated supply-chain solutions,” Smith noted.

Recent Results

Back in August, SMTX announced second quarter 2018 results.

Q2 Financial Highlights

► Revenues increased 34.8% to $44.5 million, compared to $33.0 million in the second quarter of 2017
► Gross profit was $4.3 million or 9.6% of revenue, which represents a 530-basis point increase (5.30%)
► Net loss of $(0.1) million or $(0.01) per share, which represents a $5.9 million improvement
► Adjusted EBITDA was $1.6 million, which represents a $5.2 million improvement compared to $(3.6) million in the second quarter of 2017

Revenue for the second quarter was $44.5 million, up 34.8% from $33.0 million in the second quarter of 2017. Sequentially, revenue increased 19.8% from $37.1 million from the first quarter of 2018. The year-over-year increase from the second quarter of 2017 was the result of strong demand both from existing and new customers in 2018 and was well-diversified among SMTX’s target end-markets.

Net loss was $(0.1) million for the second quarter of 2018, compared to a net loss of $(6.0) million in the second quarter of 2017. SMTX reported net earnings of $8 thousand for the first quarter of 2018.

Management's Comments

Commenting on the quarterly results, Ed Smith, SMTC’s President and Chief Executive Officer stated, “I am pleased to report that we are exceeding our business plan. During the second quarter we added two new customers and further expanded programs with existing customers. With our focus now squarely on our growth, we continue to see strong demand and an accelerating trend in our backlog metrics with growth in our semiconductor, test/measurement and medical business lines. Our backlog and business pipeline, barring any further tightening of the supply chain by electronic component suppliers, should support year-over-year revenue growth in excess of 25 percent for the full year 2018, and increased gross profits, adjusted EBITDA, and earnings, as we indicated in our July 23, 2018 press release.”

“Even against a backdrop of uncertainties with global trade policy and with higher levels of demand in the industry causing supply chain challenges, we believe our robust supply-chain and operating model afford us flexibility to continue to grow our business and support our customers. Our commitment to operational excellence and serving our customers, we believe, will position us to achieve industry-leading quality and superior customer on-time delivery metrics,” Smith added.

Locations

Corporate Headquarters

SMTC Toronto, (Canada) is located in the heart of Canada’s technology region. This location serves as the corporate headquarters and operates as our Center of Excellence (COE) to support our global manufacturing locations in value engineering, transition management and global supply chain management services.

This location also includes SMTC’s senior executive team, corporate finance, corporate IT, and legal. They support SMTX’s global operations.

SMTC Fremont

SMTC Fremont (USA) is a manufacturing facility and holds offices for SMTC’s senior executive team. This location is focused on providing a highly flexible, innovative technology center for new product introduction (NPI) and local high-mix, medium to low volume production. We

service customers all over North America for manufacturing services that include PCBA, system assembly, structural and functional testing & development, box build, final product integration, order fulfillment, BTO/CTO with worldwide customer logistics.

We have the capability for incubations of a product for migration to a low cost region.

Key Location Attributes

► 65,000 square feet
► ISO 9001:2008; ISO14001:2004 and ISO-13485:2003 registered facility

SMTC El Paso

SMTC El Paso (USA) location provide comprehensive logistics and repair services across North America. Strategically located near the US and Mexico border and El Paso airport. The facility specializes in logistic services, after market services and end-of-life solutions providing cross-border logistics, customer support, international shipping/trade compliance, distributions, reverse logistics and direct fulfillment.

SMTC Hong Kong

SMTC Hong Kong (China) is our Asia Headquarters in supporting and overseeing all the operations in Asia. This location also serves as our International Procurement Office which is dedicated to seeking the most cost-effective products and materials across the globe, in support for SMTC’s worldwide manufacturing operations.

It also aims to establish the best procurement system through a worldwide network and to provide daily procurement service for our business needs.

SMTC Dongguan

SMTC Dongguan (China) is a medium to high volume, medium to low mix facility servicing OEMs requiring lowest cost global

manufacturing. Manufacturing services include assembly, testing, box build, final product integration, and worldwide customer logistics. Dongguan provides a pathway to levering Asia-based manufacturing for customer export or domestic sales.

Key Location Attributes

► 150,000 square feet of dedicated manufacturing space
► ISO 9001:2015 Certification facility

SMTC Chihuahua

SMTC Chihuahua (Mexico) is a medium to high mix, medium to higher volume “Copy-Exact” facility with vertically integrated, enclosure & precision sheet metal fabrication with interconnect capabilities. Our Mexico facility also offers complete system integration & test, box /

module build and Value Engineering capabilities to OEM customers requiring lowest cost North America manufacturing.

Manufacturing services include assembly, testing, box build, final product integration, and worldwide customer logistics.

Key Location Attributes

► 215,000 square feet, 17.5 acre campus
► ISO 9001:2008; ISO14001:2004 and ISO-13485:2003 registered facility

Management

Edward Smith
President, Chief Executive Officer, Director

Mr. Ed Smith is President, Chief Executive Officer, Director of SMTX. Mr. Smith will commence providing management services to SMTX on February 6, 2017, working alongside outgoing President and Chief Executive Officer, Sushil Dhiman, during this transition period, and assume the role of Interim President and Chief Executive Officer on an ongoing basis beginning on February 17, 2017. Mr. Smith has extensive experience in the electronic manufacturing services (EMS) industry and the electronic components distribution industry. He most recently served as Senior Vice President, Global Embedded Solutions at Avnet, Inc. during 2016 and as President, Avnet Electronics Marketing Americas from February 2009 to March 2016. Mr. Smith has also served in various other positions at Avnet, Inc. beginning in 1994. From 2002 to 2004, Mr. Smith served as President and Chief Executive Officer of SMTEK International, Inc., a tier II manufacturer in the EMS industry.

Steven M. Waszak
Chief Financial Officer

Mr. Waszak joined SMTX in February 2018 as Vice President of Mergers and Acquisitions. He is a veteran technology executive with an extensive track record of success in driving profitable growth through acquisitions and internally developed initiatives. Prior to SMTX, he served as CFO at Connected-Holdings, LLC, an end-to-end, vertically integrated, Internet of Things "IoT" intelligent services provider. Earlier, as CEO and President of BTI Systems, a developer of optical communication networks and data-center interconnect solutions for Web 2.0 and public cloud providers, Waszak led SMTX through significant customer expansion and earned a position on Deloitte's Fast 50 list of North America's fastest growth tech companies.

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Conclusion

SMTX finished the quarter with $44.5 million in revenue, up 34.8% from a comparable quarter last year and 19.8% from prior quarter.

During this quarter, SMTX added 2 new (top-tier) customers and further expanded programs with existing customers. The company's backlog should support revenue growth in excess of 25% for the full fiscal year 2018. Their Fremont and China sites earned a profit for the first time in almost two years and continue to improve results. Both sites have won new customers, while improving efficiencies.

Another opportunity, their Fremont location is on track to achieve AS9100 accreditation, which will provide an opportunity to expand into avionics, aerospace and defense markets. They have plenty of capacity left at Fremont so this will be another excellent growth driver.

We believe revenues for all of 2018 will come in at a 30% increase over 2017 (Just over $180 million). There still is room for more as SMTX can handle well over $200 million in production with all of its locations.

We believe the market is not giving SMTX enough credit here. Sure, management did make a rights offering to raise cash (they expect to use much of that for acquisitions) but the effect on the stock has long since passed. SMTX's stock price is creeping higher and we believe this will be a great time to get in BEFORE the stock pops back up on investors' and traders' scans. We believe that SMTX should end up trading over $5.00 in a fair market as soon as the next 2-3 months.

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Penny Stock Pick for October 9, 2018

Symbol: SMTX

SMTC Corporation

IMPORTANT: This company's symbol is SMTX, not SMTC. There is another company with the SMTC symbol so please take extra care to make sure you are viewing symbol: SMTX.

Company Profile

New Supply Chain Center

Recent Results

Management's Comments

Locations

Management

Conclusion