Magni-Tech (Magni) reported an 18% YoY decline in 2QFY22 headline net profit to RM17.1m. After adjusting for one-off disposal and foreign exchange gain amounting to RM17.3m, Magni slipped into a core net loss of RM0.2m. The weak performance was mainly due to suspension of its Vietnam operations as a major lockdown was imposed by the Vietnamese government. Cumulative 1HFY22 results were below expectations, accounting for 20% of our forecast. The discrepancy in our numbers was mainly due to the longer-than-expected lockdown in Vietnam. As such, we are adjusting our estimates downwards by 3-16% for FY22-24F, mainly to account for the suspension of Vietnam operations and higher raw material costs. Nevertheless, we are anticipating a recovery in earnings in 2HFY22 onwards, driven by Magni’s major customer’s investment in digital platforms to spur online sales, stronger holiday sales as well as the growing awareness on health and fitness among consumers. Our Outperform call on Magni is maintained, with a lower TP of RM2.65 (RM2.85 previously). An interim dividend of 2sen per share was declared.

• 2QFY22 revenue (-58.3% YoY, -63.3% QoQ). Garment revenue fell by 65.2% YoY to RM85.1m, as Magni’s Vietnam operations were suspended for 2 months during the quarter due to the imposition of lockdown measures. Note that Vietnam has imposed a major lockdown from 19th July 2021 to 30th September 2021. On the other hand, packaging segment revenue grew by 11.1% YoY to RM27.2m, due to higher sales orders received.
• 2QFY22 net profit (-18% YoY, -18.8% QoQ). After adjusting for gain on disposal of the vacant industrial property (RM16.9m) and forex gain, Magni reported a core net loss of RM0.2m. Packaging segment PBT decreased by 48.1% YoY, mainly attributable to the increase in raw material costs for both paper and plastic packaging. Magni’s operating margin fell to 0.4% (2QFY21: 9.6%), in tandem with the lower production days.
• Outlook. We are expecting a recovery in Magni’s earnings moving forward, following the easing in Vietnam’s lockdown measures. We gather that Magni has been ramping up its production to meet the demand from its major customer and is currently operating at an utilisation rate of c.85%. We believe that the fundamental shift in consumer behavior towards online channels will bode well with Magni, as its major customer continues to invest on its digital platforms to directly connect and provide better experience to consumers. In addition, the increase in consumers’ desire towards athleisure apparels and larger movement in health and fitness should continue to drive global sportswear demand. All told, we remain optimistic on Magni’s future prospects.

Source: PublicInvest Research - 28 Dec 2021