• 4Q20 revenue and core earnings fell by 29% qoq and 39% qoq respectively due to production disruption during the Movement Control Order (MCO)
• MTAG Group (MTAG)’s FY20 core net profit of RM31m (+1% yoy) was above expectation, accounting for 105% of our full-year forecast
• Raised FY21-22E EPS by 9% to factor in higher margins and raised our 12- month TP to RM0.75 (from RM0.59), but downgrade to HOLD on valuation.

FY20 Core Net Profit of RM31m (+1% Yoy); Above Expectations

Despite a 13% yoy decline in FY20 revenue, MTAG’s FY20 core net profit came in at RM31m (+1% yoy). The improvement was largely driven by a better product mix, which led to a 3.1ppt increase in the FY20 EBITDA margin. The earnings were above our expectation, accounting for 105% of our full-year estimate, due to higher-than-expected margins.

Weaker Sequentially

As anticipated, MTAG’s 4QFY20 core net profit fell by 39% qoq to RM5m on the weaker revenue (-29% qoq) and weaker EBITDA margin (-4.6ppts to 24.2%), largely due to production disruption during the MCO imposed by the Malaysian government between mid-March and early May 2020. We learnt that MTAG had resumed operation with 100% of its workforce from mid-May 2020. We believe MTAG’s prospects remain healthy moving into FY21, and it has sufficient liquidity (net cash: RM110m) to weather the economic uncertainties due to the Covid-19 pandemic.

Downgrade to Hold With Higher TP of RM0.75

We raise our FY21-22 earnings forecasts by 9% to incorporate higher margins, and introduce our FY23E forecasts. In tandem, we raise our 12-month price target to RM0.75 (from RM0.59) based on a higher 14x CY21E PER (from 12x; a 10% discount to the 5-year EMS sector average of 16x). Although we like MTAG for its solid fundamentals, technical expertise in niche printing, relatively high margin vs. its peers, we think that the current valuation at 14x FY21E has priced in the positives. Hence, we downgrade our rating to HOLD (from Buy). Key upside/downside risks: i) higher/lowerthan-expected orders from key customer, ii) higher/weaker-than-expected margins, and iii) downturn in household appliances industry and an economic slowdown.

Source: Affin Hwang Research - 26 Aug 2020