Good set of 1Q15 results. The recent announced 1Q15 result came in within expectation where Magni’s net profit was climbed 10.3% YoY to 10.1m and accounted for c.24.6% of our full-year estimate. The decent results were mainly driven by higher revenue of RM177.2m (+17.4% YoY) which was underpinned by both the garment manufacturing and packaging divisions. The garment manufacturing accounted for c.83% of the group’s total turnover in 1Q15 while the balance came from the packaging division. Operating profit, however, merely improved by 8.1% YoY to RM11.3m with lower margin of 6.4% (vs. 6.9% in 1Q14) as a result of the lower other income (that comprised realised forex gain/loss, rental income, and etc.).

8.0 sen DPS set to go ex on 21 October 2014. The total 8.0 DPS comprised a final tax exempted dividend of 3.0 sen and 5.0 sen special single-tier dividend for the financial year ended April-2014. Together with an interim dividend of 5.0 sen, Magni has rewarded shareholders a total 13.0 sen DPS in FY14 which translated into a dividend payout ratio of 33.6%.

Strong balance sheet with a net cash of RM103.6m (95 sen/share or 30.8% of the group’s current market cap of RM336.3) and zero gearing as at end-1Q15 (vs. RM70.9m in end-FY14). The group’s reserve also continued to surge and recorded RM136.5m (vs. RM126.4m in FY14) while its net asset per share improved to RM2.26 (from RM2.17 previously). With the current share outstanding of 108m coupled with an estimated low freefloat of 19% (based on Bloomberg estimate), we believe MAGNI is well positioned to improve its share liquidity.

Cotton prices drop 26% from high as China reduces stockpile. Bloomberg reported that cotton prices (figure 1 & 2) have declined as Chinese authorities reduce the nation’s stockpile, a move that should boost apparel makers’ margins. Global cotton prices are down more than 26% from April highs, dropping to less than 70 cents a pound for the first time since November 2011. China had been stockpiling cotton for three years, with reserves exceeding manufacturers’ needs. While the weaker cotton prices are expected to have a positive impact to Magni’s earnings, we, however, are unable to quantify the earnings impact due to its ‘investors shy’ approaches adopted by the management.

Operational strategies. While we have no access to the management thus far, we understand from its annual report that key factors affecting the operating performance in the garment segment include labour costs, other operating costs and products demand while plastic and paper-related raw material costs remain a key factor in its packaging business. Strategy-wise, Magni intends to continue strengthening the business partnership with its key customers in the garment business in order to procure higher orders. As for packaging segment, we understand the group will continue to focus on consumables, food and beverage, healthcare related products and pharmaceuticals, which are not only recession proof but also have higher value-add.

Earnings forecasts remain unchanged post the 1Q15 results release. Our FY15E earnings estimates are based on a 5% organic annual revenue growth (vs. 24% CAGR since FY05) with a targeted 6% net profit margin.

Target price maintained at RM3.82 but stock rating downgraded to NOT RATED from TRADING BUY previously as we continue to have no access to the group’s management which limit earnings visibility on our end. Having said that, the group is currently trading at a historical FY14 PER of 7.9x (vs. the FBM Small Cap Index’s forward PER of 12.4x), which is still undemanding in our view. Our target price maintained at RM3.82, based on a targeted FY15E PER of 10.1x (representing the highest PER since FY09 or post the financial crisis).  

Source: Kenanga