MTAG - Higher TP - “Overweight” Call from Affin Hwang Capital Research on Electronics Manufacturing Services

Target Price from Various Research Houses on MTAG

On average, target price of RM 0.713 has been placed on MTAG to reflect the promising prospect of MTAG.

Industry Outlook

Affin Hwang Capital research has initiated coverage on the electronics manufacturing services (EMS) sector with an overweight call on expectations of rising demand from a shared key customer and trade diversion from China.

It added in a note that sector PE valuations have de-rated over the past two years due to lowered growth expectations and the sector is trading below its historical mean PER of 13X on CY2020E.

According to Affin Hwang, VS Industry, ATA IMS and SKP Resources are the three largest home-grown EMS players in Malaysia, which collectively produce more than 50% of a key customer's global production of a major household appliances brand.

"The key customer is able to enjoy a lower cost of production with its entrenched ecosystem in Malaysia and will continue its investment in technology which should benefit the Malaysian supply chain," it said.

In addition, trade diversion from China has resulted in the domestic EMS players receiving increased enquiries from multinational corporations, it said.

MTAG - Hidden Gem in Electronics Manufacturing Services (EMS)

MTAG is principally involved in the provision of customised converting services, printing of labels and stickers for MNCs. The group’s core competence is converting various type of materials such as mesh, adhesive tapes, papers, plastics, foams, cardboards and metals into predefined shapes and sizes. MTAG is also an authorised distributor of 3M and Henkel industrial tapes and adhesives products.

To date, MTAG serves over 600 customers across all market segments with key clients such as ATA IMS, V.S. Industry, SKP Resources hence indirectly services Dyson Manufacturing Sdn Bhd (“Dyson”). Having more than 10 years of business relationship with Dyson, 80% of MTAG’s revenue are derived from Dyson. To recap, Dyson Ltd is a British technology company renowned for its cutting-edge smart home appliances.

Presently operating at a production capacity of 80%, bulk of the IPO proceeds (~46%) is earmarked for expansion via land acquisition in Johor Bahru for a new manufacturing plant plus purchasing of 11 new machines, including a digital offset printer, which has higher efficiency compared to the conventional printer.

The expansion will see MTAG’s annual production capacity for printing of labels and stickers increase by almost 100% from 324.5m pieces to 636.8m pieces by year 2023. Meanwhile, 18% of the proceeds will be utilised for capital expenditure while 14% is for repayment of bank borrowings resulting with an annual interest savings of RM0.5m.

Post listing and with the lPO proceeds, the group will be sitting on a RM91m cash pile. MTAG has a dividend policy payout of 20%, translating to dividend yield of 2.1% and 2.3% in FY20 and FY21 respectively. Riding on the growth of its major client as well as the electrical and electronics industry, EPS is expected to grow by 13.3% and 12.6% in FY20 and FY21 respectively.

On average, target price of RM 0.713 has been placed on MTAG to reflect the promising prospect of MTAG.