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Author: loginvest   |   Latest post: Wed, 27 Nov 2019, 11:49 AM

 

Magni-Tech Industries Bhd 1Q FY 2020 Update Report (HOLD)

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UPDATE REPORT

Sequential revenue increased substantially at MTI 1Q FY20 vs 4Q FY19, as garment orders have been quite strong. Meanwhile, profits have also improved, as net margins have remained steady at around 9%. With economic growth slowing in many countries around the world, it is unlikely that sales will continue to accelerate sharply in the quarters to come. And though MTI may benefit from some shifting of production from China to Vietnam, the US has already placed higher tariffs on aluminium and steel made in Vietnam on the grounds China was using Vietnam to avoid anti-dumping duties. However, whilst conditions remain challenging for MTI, we expect operations to remain profitable.

INVESTMENT RISKS

Risks to our recommendation and target price include: i) a reduction in demand for affordable sportswear, ii) a weaker USD, which would reduce currency translation of sales and profts, iii) rising trends in material costs, iv) an increase labour costs, v) a sharp slowdown in the general level of economic activity in the major economies, and vi) increases in tariffs on consumer goods made in Vietnam.

RECOMMENDATION

We maintain our HOLD recommendation on Magni-Tech Industries Berhad (“MTI”) whilst increasing our fair value estimate to MYR 5.30. The outlook for Nike, MTI’s largest customer is stable. Also, the weaker MYR is working in MTI’s favour. However, we prefer to wait another quarter or two for confirmation of a) continued garment demand and b) little or no punitive US tariffs on garments made in Vietnam before placing a BUY recommendation on MTI. Also, labour costs in Vietnam may rise as the increasing number of Chinese owned factories would likely lift wages as they compete to attract workers. However, MTI does have a clean balance sheet, and value investors may want to accumulate at levels below MYR 4.90. Also, the shares currently yield above 4.5%.

COMPANY PROFILE

Magni-Tech Industries Berhad is a Malaysia-based investment holding company that is also engaged in the provision of management services. The Company operates in two business segments: manufacturing of garments and packaging materials. Apparel sales make up more than 90% of group revenue. More than 90% of its apparel sales are derived from Nike Inc. The group has an annual capacity of 35.6 million pieces at a utilisation rate of 70% and plans to increase its capacity to 50 million pieces by 2020. The Company markets its products in Malaysia, Vietnam, the United States, Europe, China, Canada, Thailand, Indonesia and Japan.

Source: Wilson & York Securities Research - 10 Sept 2019

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