MTAG’s 3QFY20 core net profit fell by 16% qoq to RM8m, impacted by lower revenue and higher effective tax rate. Despite the weaker 3QFY20 results, MTAG’s 9MFY20 core earnings of RM26m was ahead of our expectation. Given the commendable 9MFY20 results, we raise our FY20-22E earnings by 10-24%, and raise our price target to RM0.59 (from RM0.53). Upgrade MTAG to BUY (from Hold).

3QFY20 Core Earnings Fell by 18% Qoq; Above Expectations

MTAG’s 3QFY20 core net profit fell by 16% qoq to RM8m, due to weaker revenue and higher effective tax rate. 3QFY20 revenue declined by 9% qoq, largely affected by the lower sales orders for its converting segment (-13% qoq), but was partially cushioned by the better performance in its distribution business (+10% qoq). In 3QFY20, the group had faced supply disruption and had to halt production due to the Covid-19 MCO from 18 March 2020. 3QFY20 EBITDA margin was also squeezed slightly by 0.3ppts to 28.8% on lower revenue and higher cost of operations from the implementation of MCO. There are no comparative figures for yoy performance as the group was only listed on the Bursa Malaysia in September 2019. Overall, the 9MFY20 core earnings of RM26m was ahead of our expectation, accounting for 109% of our forecast. The earnings surprise was due to higher-than-expected revenue and margins.

Earnings Likely Weaker in 4QFY20; Better Prospects Ahead

We think MTAG’s 4QFY20 earnings will likely weaken sequentially, considering the rising cost of operations and the group had only resumed operations with <50% utilisation steadily since early April 2020. Notwithstanding the 4QFY20 setbacks, forward prospects look bright – we learnt that MTAG is currently operating at an estimated 80% of its capacity, close to its pre-MCO utilisation levels, to cope with the unprecedented backlog of orders. MTAG’s near-term orders from key customers are still intact despite the uncertainties arising from the Covid-19 pandemic.

Upgrade to BUY With Higher TP of RM0.59

Given the decent 9MFY20 results, we raise our FY20-22E earnings forecasts by 10-24%. In tandem, we raise our 12-month price target to RM0.59 (from RM0.53) based on an unchanged 12x CY21E PER, and upgrade to BUY (from Hold). 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 10x FY21E PER. Downside risks: key customer risk, downturn in household appliances industry and economic slowdown.

Source: Affin Hwang Research - 22 Jun 2020