Results Report

YTD 2Q FY18 revenue decreased 0.9% vs YTD 2Q FY17, whilst net profits decreased 23.0% over the same period. The garment segment accounted for 90.5% and 96.2% of revenue and operating profit re-spectively for YTD 2Q FY18. Sequential garment revenue fell by 15.3%, however garment results increased by 19.7% vs 10 FY18. Labour costs in both Malaysia and Vietnam have risen substantially over the last few quarters. Though conditions remain challenging for Magni-Tech, we expect operations to remain profitable with margins stabilising around current levels. 

Investment Risks

Risks to our recommendation and target price include: i) a reduction in demand for affordable sportswear, ii) a weaker USD, which would reduce currency translation of sales and profts, iii) rising trends in mate-rial costs, iv) an increase labour costs, and v) a sharp slowdown in the general level of economic activity in the major economies. 

Recommendation

We maintain our HOLD recommendation on Magni-Tech Industries Berhad (WTI') but reduce our fair value estimate to MYR 6.28. The outlook for Nike, MTI's largest customer is becoming less bright. We expect MTI to continue receiving new orders from Nike as the garment segment of Nike has a better outlook than other segments. However, it seems that rev-enue growth will be slower than that seen over the past few years. In addition, operating costs have been on the rise and thus we expect margins to remain subdued. Finally, the current trend of the USD does not bode well for exporters like MTI. 

Company Profile

Magni-Tech Industries Berhad is a Malaysia-based investment holding company that is also engaged in the provision of management services. The Company operates in two business segments: manufacturing of garments and packaging materials. Apparel sales make up more than 90% of group revenue. More than 90% of its apparel sales are derived from Nike Inc. The group has an annual capacity of 35.6 million pieces at a utilisation rate of 70% and plans to increase its capacity to 50 million pieces by 2020. The Company markets its products in Malaysia, Viet-nam, the United States, Europe, China, Canada, Thailand, Indonesia and Japan.

Source: Wilson & York Securities Research - 12 Dec 2017