Visit our webpage for full post: https://jawplace.com/quarterly-result-review-10-magni-tech-industries-berhad-7087-value-vs-growth-why-not-both/

Brief Background
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 mainly two business segments: manufacturing of garments and packaging materials.

Garments : It manufactures garments and supplies them mainly to Nike Inc. where the end-products are distributed worldwide where its markets include the USA, European Countries, South America, China, Japan, Mexico, Australia and Canada. The garment business accounted for 92.2% of the Group’s revenue. The Group’s garment business is undertaken by its wholly-owned subsidiary, South Island Garment Sdn Bhd (SIG) which operates both locally and in Vietnam.

Packaging Materials : The packaging products (i.e. flexible plastic packaging goods and corrugated cartons) are typically used by the manufacturing sector, such as the food, beverage, healthcare, rubber based, consumer household and electronic sub-sectors. The packaging facilities include printing and lamination process.

Breaking-down the Company Recent Quarterly Financial Statement

1. Revenue – The Company revenue has increased by 17.3% from RM313 million to RM367 million as compared with the preceding year corresponding quarter (Q3 2020). Breaking down into segment, the garment and packaging segment revenue increased by 17.8% and 11.6% respectively.
2. Operating expenses – The Company operating expenses has increased by 15.9%, which is in line with the increase in their top line of 17.3%. However, due to automation and cost optimisation initiative in place over the years to improve the Company manufacturing productivity, the Company has managed to reduce the operating cost while increasing their top line figure. To recap, In 2018, Magni-Tech has spent RM 7.3 million in machine upgrades where new machineries are acquired to replace obsolete ones in its packaging business.
3. Gain on disposal of properties – In the recent quarter, the Company has managed to dispose of its non-operating subsidiary for a value of RM6.940 million.
4. Profit – The adjusted net profit will be RM 42.8 million, which will translate its earning per share of 9.8 cents.

1. Cash – with the recent increase in their profit, the company has managed to increase their cash to a historical level of RM333,765 million. At present, the Company is running with a net cash position and net cash per share of 0.77 cents.
2. FCF – During the recent quarter result, the Company generates a positive RM77 million cash from operating and a capex of RM 11 million which derive to a FCF of 66 million and a FCF yield of 6.1%.

Trading in a Export Market (Note: For Financial Year 2020)

The Group’s operations are located mainly in Malaysia except for a subsidiary’s garment operations which are carried out both in Malaysia and in Vietnam. Revenue from the packaging material segment is primarily derived in Malaysia while revenue from the garments segment is mainly derived from a single customer who has operations worldwide.

Hence, based on the table above, more than 90% of the Company revenue is derived from external countries.

Based on the above graph, any fluctuation in the USD exchange rate will impact the Company's profit margin (or net profit). However, the recent depreciation in the USD/MYR exchange rate did not affect the Company's profit margin.

Growth Prospect
One of the key question is that can the Company continue to grow after showing the recent good result?
We further analyse the correlation between the Company quarterly sales and major international sporting event such as World Cup and Olympic.

Major international sporting event dates (note that the above quarter and date is in accordance with the Company's financial reporting date to reflect the exact impact of the Company's quarterly result) are listed in the below table:

Based on the above graph, out of the 2 (two) World Cup event that took place in 2014 and 2018, we could observe that 1 (one) month prior to the 2018 World Cup, there was an increase in the Company's Q4' 2017 sales figure. According to our analysis, we have identified that out of 10 financials (from FY 2011 to FY2020) that we have analysed, the Company constantly reports a lower Q4 sales figure, however with only 1 exception in 2017 which is prior the World Cup.

Pertaining to the Olympic Sporting, we could identify that there were 2 (two), out of 4 (four) instances where the Company's reported a higher sales prior to the Olympic Games. Hence, there is a 50% positive correlation between the Company's sales and major international sporting event (i.e. World Cup and Olympic Games).

The graph below further illustrates that in general, the Company has the tendency to report a higher sales in Q3 and lower sales Q4, probably due to the slowdown in the sales after the festive season and/or lower productivity during the month (due to Chinese New Year period).

Jaw’s Take (Investment Thesis – Summary)
1. Digital sales to soften the loss in retail sales – During the lockdown in China previously, Magni‟s major customer changed its strategy to focus on its online stores.
2. Mega sporting event – Mega sporting events like World Cup 2020 and Tokyo Olympics should augur well for sporting demand and there tend to be positive correlation between major sporting event and the sales of the Company
3. Huge cash pile – It will be interesting to observe and watch if the Company decides to proceed with M&A activities or using their cash to diversify to other brands/ products to increase their revenue stream.
4. Dividend yield of 3.5%.
5. Valuation –  (visit our webpage for the valuation and what we think : https://jawplace.com/quarterly-result-review-10-magni-tech-industries-berhad-7087-value-vs-growth-why-not-both/)

Key Risk
1. Prolong of covid-19 which could potentially affect the consumer demand and spending.
2. A weaker USD, which would reduce the Company currency translation of sales and profits.
3. Rise in labour and raw material costs (recent increase in resin and pulp price may impact the margin of their packaging segment).
4. Delay in major sporting event (due to unforeseen circumstances such as covid) which could further dampen the Company growth and sales.

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