• MTAG’s results were above our/consensus estimates, as its distribution business surprised on the upside
• Cumulative 6MFY21 distribution revenue came in at RM20m, already achieving 71% of that in FY20, driven by higher tapes and adhesives demand from existing customers
• Raising FY21-23E EPS forecasts by 4-6%. MTAG remains a laggard play in the EMS space. Reiterate our BUY rating with a higher target price of RM1.09

Results Above Expectations

2QFY21 revenue grew 18% yoy on the back of stronger converting and distribution revenue which increased by 16% and 26% respectively, driven by higher mesh demand and distribution of adhesives tapes. Though EBITDA margin declined by 4.6ppts yoy, that should not be viewed as alarming, as normalized margin should be in the range of 25- 26%. Excluding one-off forex items, 2QFY21 core profit came in at RM9.3m, bringing 6MFY21 to RM19.2m (+6% yoy). Overall, results were above our expectations, as distribution revenue came in stronger than our earlier expectations – 6MFY21 distribution revenue of RM20m was significantly higher compared to a year ago (estimated FY20 distribution revenue of RM30m). We gather that these orders were from existing customers, and the order pipeline remains encouraging.

Sequential Core Profit Fell 6%

2QFY21 revenue fell by a marginal 2% qoq as distribution revenue has fallen slightly more than the converting business. Core net profit was down by 6% qoq, or a decline of RM600k, as a result of a 1.3ppt drop in EBITDA margin.

Reiterate Buy

We raise our FY21-23E EPS forecasts by 4-6% to factor in the better-than-expected distribution revenue. MTAG is expected to take delivery of 8 new machines in FY21 which should see current capacity expand by 20% to cater to higher expected clients order. c.55% of its overall FY20 revenue was derived from mesh. We raise our target price to RM1.09 (from RM0.98) while also raising our PER multiple to 17x (from 16x). Sitting on RM121m net cash (RM0.18/share), and backed by an impressive 30% expected EPS growth in FY21, MTAG is currently trading at 13x CY21 forward PER (vs its peers at 22x), making it a laggard player in the EMS space, in our view. Maintain BUY. Downside risks to our call: weaker-than-expected household appliance demand, slower-than-expected economic recovery and unforeseen COVID cases at its factory resulting in closure.

Source: Affin Hwang Research - 23 Feb 2021