• We believe MTAG has been overlooked amid the recent run-up in the EMS space – a laggard play with decent earnings growth backed by robust orders and expansion underway
• Raising our FY21-23 EPS forecasts by 2-10% to factor in new machineries which would see a +20% growth in capacity
• Upgrade to Buy with a higher 12-month target price of RM0.98 (from RM0.82)

Expected capacity expansion of 20% in the near term

MTAG reported a 13% yoy decline in FY20 revenue on the back of weaker mesh demand as a result of MCO. However, this was mitigated by improved margins from better product mix and higher interest income post listing proceeds. MTAG is expected to take delivery of 8 new machines which should see current capacity expanding by +20%, in anticipation of robust future customers’ orders. MTAG has been running on an optimum 80-85% plant efficiency post MCO. We gather that MTAG is also in the midst of getting qualified for new customers recently secured by its EMS peers. In terms of revenue mix, more than 50% of its current revenue are derived from mesh, followed by 20% from stickers and labelling.

Positive long-term outlook underpinned growth

The ongoing supply chain rerouting out of China will continue to be a multi-year secular trend, driving EMS sector growth. This should benefit MTAG’s earnings as a result of robust customer new order flows. The outlook for the label printing and converting industry continues to look positive, projected to grow at an 8.2% CAGR from 2019-2023. Recent news on the key common customer for EMS players is that it is looking to invest £2.7bn to double its product range by 2025. This is a key positive and testament that consumers’ appetite towards improving home-quality living remains strong.

Upgrade to Buy

We raise our FY22-23E EPS by 2%/6%/10% by incorporating its new capacity growth. We raise our target price to RM0.98 (from RM0.82), based on higher 16x PER multiple (14x previously) CY21E EPS. Our ascribed multiple represents a c.25% discount used among the rest of its peers. We upgrade the stock to a Buy (from Hold) and view MTAG as a laggard sector play, backed up by decent earnings growth coupled with appealing valuation. Key risks include lower-than-expected customer orders, margin compression, unfavorable product mix in the new pipeline, or possible of another lockdown affecting production.

Source: Affin Hwang Research - 8 Dec 2020