• MTAG’s prospects remain promising, like those of its peers
• The group is expected to add 2 high tech machines to cater to more sophisticated customer demands
• Trimming 2021 earnings projection by 6% as recent resurgence in cases has delayed deliveries, and 2022-23E earnings by 3%. Lowering our 12- month target price to RM1.04, based on a 17x PE multiple.

Maiden contribution from new customers in 2QFY21

In the recently released 2QFY21 results, revenue fell by a mere 2.5% qoq despite the accumulated back log after the lifting of the Movement Control Order in 1QFY21, supported by maiden contributions from new customers. This is a direct read-through from other EMS players, which indicated that production was gradually being ramped up for new models. We understand that MTAG should have no issue in supplying to new customers in the pipeline, based on its existing relationship with the current contractor manufacturers. In addition, MTAG has different channels where it negotiates directly with end customers.

Looking to add 2 machines in the coming quarter

The initial IPO plan in Sept-19 to double its capacity has hit a snag due to rising land costs despite the pandemic, which made sourcing for land more challenging. MTAG has ordered an additional 2 machines with high-end features that are expected to be delivered by end-3QFY21 to cater to higher volumes. We understand that demand for these machines has not been confirmed, and that the capacity could merely replace existing capacity.

COVID-19-free on its own premise, but customers affected

All of its recent foreign worker swab tests came back negative, which is assuring for its operations. However, we gather that its customers’ factories had to be shut down for a couple of weeks due to some workers testing positive. This has also affected peers like ATA IMS which had to reschedule delivery timelines.

Reiterate Buy

We lower our target price to RM1.04 (from RM1.09) after trimming our CY21-23E EPS by 3-6% to factor in the potential prolonged delay in customer deliveries, but maintaining the FY21E PER of 17x. We reaffirm our Buy rating as we see MTAG as a laggard sector play, backed by decent earnings growth coupled with appealing valuation. Key risks include lower-than-expected customer orders, margin compression, an unfavorable product mix in the new pipeline, and another lockdown affecting production.

Source: Affin Hwang Research - 12 Mar 2021