· An alternative to PRLEXUS. While we were unable to access MAGNI’s management for more information, we noted many similarities to another garment manufacturer PRLEXUS which we recently issued a TRADING BUY recommendation (TP: RM3.15 @ 10x FY16E PER). We like MAGNI as a proxy to NIKE’s growth trajectory and a consumer play which is relatively unscathed by the weak local landscape.

· Unaffected by weak local sentiment. The garment segment makes up 83.2% of FY15 revenue which we gather is mostly derived from NIKE, whom they have been dealing with since 1985. It appears that the athletic apparel market has been on a growing trend as seen with NIKE’s estimated FY16-17 revenue growths of 19%-9% vs. the 3-year historical average growth rate of 9%. As a result, MAGNI has been enjoying steady positive earnings growth over the last 10 years with a 3-year historical average growth of 20% (up to FY15). Since the demand is internationally driven, they will be spared from the weak local landscape. The remaining business is mainly in the relatively stable packaging segment. MAGNI’s set-up is similar to PRLEXUS where NIKE is also the top contributor, but PRLEXUS has a much higher 3-year historical average earnings growth rate of 49% due to its lower base effect, whilst we understand that PRLEXUS has been expanding its capacity.

· Margin improvements aided by lower raw material cost and the USD factor. Cotton prices have stabilized at its 3-year low levels (currently at USD65.4/lb) since the peak in 2011 of >USD200/lb. This has helped the group to mitigate recent challenges (e.g. minimum wage policy, competition, FOREX), resulting in the group achieving uninterrupted margin expansion until today. In PRLEXUS case, they are net positive beneficiary of the strengthening USD-MYR where a 5% increase in the USD-MYR will increase its bottomline by 8%-10%. In MAGNI’s case, based on their sensitivity analysis on FOREX risk as provided in their annual report, it appears that a 5% appreciation in the USD-MYR would result in a c.3% increase in bottomline. Net margins have improved by 3.5ppt to 7.5% since 2011 and are also comparable or slightly better than PRLEXUS’ 6.3% in FY14. Note that MAGNI’s FY16E ROE of 19% is also comparable to PRLEXUS’ 17%.

· Net cash balance sheet and decent yields. MAGNI is in a strong net cash position with no borrowings and it paid out c. 35% as dividends with the last 2-year historical yields at 3.0%-3.2%. PRLEXUS is also in a net cash position but has some borrowings and only paid out less than 15% over the last two years (historical yields: 1.5%-2.3%). In this respect, MAGNI has a better reward scheme for their shareholders while those that are looking at PRLEXUS must be mindful of their expansion and potential supply chain expansion plans.

· Projecting FY16E core earnings growth of 4.7% based on 5.1% YoY topline increase or less aggressive than PRLEXUS’ 15% YoY revenue growth since PRLEXUS is riding on its capacity expansion. However, MAGNI’s FY16E net margins of 7.4% will be better than PRLEXUS’ 5.3% as the latter’s expansionary cost will only normalize in 2017. We estimate FY16E dividend yield of 4.2% based on 35% payout. · Trading BUY with FV of RM5.15 based on 10x FY16E PER. While MAGNI’s market cap is 66% higher than PRLEXUS’, note that MAGNI is less liquid. In our recent PRLEXUS OR (27/7/15), we pegged its valuation at 10x and based on the above arguments, we believe that MAGNI deserves the same as well. Our applied PER is inline with the FBMSC Fwd PER of 10x.

Source: Kenanga Research - 6 Aug 2015