INVESTMENT MERIT

- A sound garment and packaging player. Magni-Tech Industries (MAGNI) is primarily engaged in the manufacturing of garments for export and a wide range of flexible plastic packaging, corrugated packaging products and display boxes. The garment segment accounted for c. 82% of the group’s total revenue in FY14 with the balance 18% coming from the packaging business.

- Uninterrupted 9-year earnings up trend. MAGNI recorded a strong net profit of RM42m (+17.1% YoY) in FY14, on the back of higher revenue (+15.1% YoY to RM651m) and better profit margins. The decent growth in FY14 was not a surprise given the group’s uninterrupted earnings upward trend since FY05, where its turnover has surged from RM94m to RM652m in FY14 (or a CAGR of 24%), thanks to the higher sale orders received from both the garment and packaging business. In line with its strong turnover growth, the group’s net profit also advanced to RM42m in FY14 (or a CAGR of 53% since FY05) with growing margin (FY05: 1.0%; FY14: 6.4%).

- Higher operational efficiency. MAGNI’s EBIT margin remains solid in FY14 (8.0% vs. 8.2% a year ago) despite facing a tougher operational challenging environment (i.e. minimal wage policy, foreign-currency fluctuations; intensifying competition and etc.). The operational efficiency was mainly driven by its lean management efforts as well as strict cost discipline. Meanwhile, the continuous investment in upgrading its technology system also enables the group to enhance customer satisfaction by providing quality products and services, including timely delivery of orders.

- Effective marketing strategies drive growth. The higher operational efficiency coupled with a strong quality control and timely product delivery have led MAGNI’S garment division to drive its sales volume in spite of the slowdown in garment consumptions in the major importing countries. The continued sound efficiency in its garment manufacturing businesses has led the group to record a strong turnover of RM530m (+17% YoY) in FY14. On the packaging segment front, MAGNI has adopted a more prudent strategy, where its focuses on consumables, pharmaceuticals, healthcare-related products, food and beverage for daily necessities that are not only recession proof but also have a higher value-added.

- Strong balance sheet with a net cash of RM70.9m (or 65 sen/share) and zero gearing as at end-FY14. The group’s reserve also surged to RM126m in FY14 from RM98m a year ago. With the current share outstanding of 108m coupled with an estimated low free-float of 17% (based on Bloomberg estimate), we believe MAGNI is capable improving its share liquidity.

- Rooms to improve dividend yield. MAGNI has continued to reward its shareholders since listed in 2000. The group has declared a total DPS of 13.0 sen (including 5.0 sen special single tier dividend) in FY14, a similar quantum a year ago, implied a dividend payout ratio of 34% and a 4.1% dividend yield. The low dividend payout ratio suggested that the group has rooms to reward shareholders further, if needed, in view of its strong balance sheet.

- Targeting an organic revenue growth for now. While we have yet to speak to the management, we are opting to be conservative for now and factored in a merely 5% YoY (vs. 24% CAGR since FY05) organic revenue growth into our financial model with a targeted 6% net profit margin. This suggested that MAGNI could potentially achieve a net profit of RM41m in FY15. We will issue a detailed report after visiting the company in coming weeks.

- TRADING BUY with TP of RM3.82. The group is trading at an undemanding historical PER of 8.2x. We fairly value the stock at RM3.82, based on a conservative targeted FY15 PER of 10.1x (representing the highest PER since FY09 or post the financial crisis). Note that, our targeted PER is also lower than the FBM Small Cap Index’s forward PER of 12.5x.

Source: Kenanga