MTAG’s 6MFY20 results was within expectations. While its 2QFY20 revenue was lower sequentially (-7% qoq), its core net profit grew 15% qoq mainly driven by higher profit margin, higher interest income and overprovision of expenses in the preceding quarter. Moving forward, we trim our FY20-22E earnings forecast by 5-6% to factor in negative impact in 1HCY20 following the Covid-19 outbreak. We maintain our BUY call on MTAG, albeit with a lower TP of RM0.70. Currently trading at only 9x FY21E PER, we think that MTAG’s valuation looks appealing given its solid fundamentals and technical expertise in niche printing and converting industry, and relatively high margin vs. its peers.

Within Expectations

MTAG’s revenue declined 7% qoq in 2QFY20. The decline in its converting business (-13%), which was due to lower sales orders, was partially offset by the growth in distribution business (+43%). Despite the weaker top-line, 2QFY20 core net profit grew 15% qoq, mainly driven by improved profit margin, higher interest income earned from IPO proceeds, and overprovision of expenses in the preceding quarter. There are no comparative figures for yoy performance as the group was only listed on the Bursa Malaysia in September last year.

Potential Risk of Lower Demand and Supply Chain Disruption

We note that MTAG is part of the “D” ecosystem that could potentially be affected by COVID-19. In term of demand, while orders from the indirect key customer remain intact at this juncture, we foresee demand to be affected by the outbreak as China is one of the main growth markets for its indirect key customer. Besides, there is also potential risk of supply chain disruption to companies within “D” ecosystem should the outbreak prolonged as c.30-50% of components are sourced from China. Based on our channel check, the inventory levels of the EMS players are still adequate at this juncture, likely until end-February or early-March.

Maintain BUY With a Lower TP of RM0.70

We trim our FY20-22E earnings forecast by 5-6% to factor in the negative impact from Covid-19. We maintain our BUY call on MTAG with a lower TP of RM0.70 (from RM0.75), based on an unchanged 13x FY21E PER. While we are cautious on the macro environment given the Covid-19 outbreak, we like MTAG for its solid fundamentals, technical expertise in niche printing and converting industry, relatively high margin vs. its peers and attractive valuation of 9x FY21E PER. Downside risks: key customer risk, downturn in household appliances industry and economic slowdown.

Source: Affin Hwang Research - 24 Feb 2020