We Understand That MTAG’s Growth Has Been Highly Correlated to Dyson and Its Suppliers (ATAIMS, SKPRES, VS) Over the Years. MTAG’s Growth Will be Fuelled by Its 3-year Expansion Plan to Double Its Capacity by FY23. We Are Projecting FY20-21 Core Net Profit CAGR of 6.3%, Underpinned by Growth in Volumes for Converting Segment (e.g. Filter and Mesh, Labels and Stickers). In Addition, MTAG Has a 20% Dividend Payout Policy, Which Implies Yield of 1.9-2.1% in FY20-21. We Derive a Fair Value of RM0.66 Based on CY20 EPS Pegged to P/E Multiple of 12.5x (below Peers Average PE of 15.5x).

Company background. MTAG Group is primarily involved in (i) printing of labels and stickers and customised converting services and (ii) distribution of industrial tapes, adhesives and other products. MTAG is authorised to distribute adhesive and industrial tapes products for 3M and Henkel. The Group has been in operation for the past 23 years and established a diversified customer base of more than 600 customers from various industries such as E&E, automotive, precision tooling, mechanical and engineering and construction. 1-6

Decent outlook of label printing and converting industry. Based on Protégé Associates market research, the label printing and converting industry in Malaysia was valued at RM5.46bn in 2018 and is estimate to reach RM8.11bn by 2023 at a 5- year CAGR of 8.2%. The growth is likely to be supported by the broad based and diversified end-user markets the industry serves as the flexibility of the label printing and converting industry.

Strong relationship with Dyson and Dyson’s supplier. Throughout the years, MTAG has established strong business relationships with Dyson suppliers, such as ATA IMS, SKP Resources, VS Industry. The total revenue contributed by MTAG’s customers who are the suppliers for Dyson amounted to 76.6%, 81.1%, 80.1% and 80.8% for FY16-18 and 9MFY19, respectively.

Dyson’s future plans could be seen as a catalyst for MTAG. Dyson is always a R&D-driven company, combining technology and trend in its smart home products. Furthermore, it may venture into electric vehicles in the years to come. Given the strong relationship over more than a decade with Dyson and Dyson’s suppliers, should Dyson launches any new products moving forward, we view this as a positive factor for MTAG’s growth in the long run.

Expansion plans to boost business for next 3 years. MTAG intends to acquire a piece of land of approximately 10 acres (435,600 sq ft) in Senai or Tebrau area in Johor Bahru to construct a new manufacturing plant to house the corporate office, production lines and warehouse. In addition, MTAG will be adding in new machineries to ramp up capacity by c.100% from the existing capacity of 325,580,000 pieces to 636,840,000 pieces by FY23.

Forecast. Despite the decline of 0.1% in FY19’s core net profit, we are projecting FY20-21 CAGR of 6.3%, on the back of the progressive expansion plans and steady growth in the label and stickers business amid the growth in E&E and potential Dyson’s new product launches moving forward.

Fair value of RM0.66. The closest comparisons that we could justify MTAG’s valuation will be Dyson’s suppliers such as VS, SKPRES, ATAIMS and ISTONE. Hence, for MTAG, we derive a fair value of RM0.66 based on CY20 of 5.3 sen pegged to PE of 12.5x (c.19% discount to its peers average PE of 15.5x). Based on management’s 20% dividend payout policy, this implies FY20-21 dividend yield of 1.9- 2.1%

Source: Hong Leong Investment Bank Research - 24 Sept 2019