2020 likely to fuel growing demand for Magni-Tech’s sportswear

This article first appeared in The Edge Financial Daily, on March 11, 2020.
2020 likely to fuel growing demand for Magni-Tech’s sportswear
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Magni-Tech Industries Bhd
(March 10, RM2.03)
Maintain outperform with a lower target price of RM2.80:
Magni-Tech Industries Bhd’s third quarter ended Jan 31, 2020 (3QFY20) revenue grew marginally by 1.5% year-on-year (y-o-y) to RM313.5 million while its net profit fell by 8.3% y-o-y to RM32.7 million. The decline in profits was mainly due to higher operating costs incurred as Vietnam adjusted its minimum wage on Jan 1, 2020 as well as a decline in productivity due to the festive celebrations.

After stripping out a foreign exchange (forex) loss of RM600,000, Magni’s first nine months of FY20 (9MFY20) cumulative core net profit was at RM90.8 million. Despite accounting for 73% of our full-year estimates, we deem the results to be slightly below our expectations as the cumulative nine-month earnings would usually account for approximately 78%-80% of Magni’s earnings due to seasonality.

As we expect 4Q to be weaker seasonally and the Covid-19 outbreak affecting the global economy and consumer sentiment, we adjust our FY20-FY22 forecasts estimates downwards by 3%-8%.

For 3QFY20, garment segment revenue grew by 2.4% y-o-y to RM289.1 million, underpinned by higher sales orders. On the flip side, packaging segment revenue fell by 8.3% y-o-y to RM24.5 million, dragged by lower sales orders and shorter working days amid the festive celebrations.

Meanwhile, the garment segment’s profit before tax (PBT) dropped by 11% y-o-y to RM42.3 million, dragged by the increase in Vietnam’s minimum wage which contributed to the higher operating costs, lower productivity due to festivities as well as the negative forex impact recorded (3QFY20) forex loss of RM600,000 versus 3QFY19 forex gain of RM400,000). Meanwhile, the packaging segment PBT jumped by 81.6% y-o-y, thanks to the lower material cost of sales.

The demand for sports apparel is likely to be negatively impacted by the Covid-19 outbreak with the slowdown in global economic growth and consumer spending. However, we believe that the negative impact is likely to be short-lived as we foresee demand to pick up gradually going forward as shops that were temporarily closed are slowly reopening.

Furthermore, as 2020 is a major sports year, it is expected to fuel the growing demand for sportswear which will likely cushion the impact of Covid-19. As for Magni’s supply chain, given China’s status as the global supply chain, the lockdown on China previously will no doubt affect Magni. However, the impact is likely to be partially mitigated by the group’s diversification strategy where it sources raw materials from Vietnam, Malaysia and Taiwan as well.

Moving forward, as Magni is currently sitting on a huge cash pile of RM300 million with no borrowings, the group is looking to explore new possibilities via merger and acquisition activities in order to diversify its product offerings and new revenue streams by venturing into new countries. — PublicInvest Research, March 10