This article first appeared in The Edge Financial Daily, on September 30, 2015.
 

Magni-Tech Industries Bhd

WE like Magni-Tech (Fundamental: 2.8/3, Valuation: 2.4/3), a contract manufacturer for global sportswear leader Nike, for its USD earnings, margin expansion, growth momentum and solid fundamentals.

Originally a paper and plastic packaging manufacturer, Magni-Tech diversified into garment manufacturing in 2006. Since then, it has recorded uninterrupted earnings growth and has been gradually raising dividend payouts in the past 10 years.

For FYApr15, revenue increased 10% to RM716.4 million, thanks to a 12% increase in garment sales. 

Net profit jumped an outsized 24% to RM52.1 million, aided by lower raw material costs and forex gains.

It continued to perform well this year. For 1QFY16, revenue grew 9% y-y to RM193.8 million but net profit soared 54% to RM15.6 million. Both key inputs, cotton and crude oil (highly correlated with polyethylene resins), are trading at its multi-year low levels, at USD60 per pound and USD47 per barrel, respectively. 

In line with improved profits, Magni-Tech is paying higher dividends for FY15 — 15 sen per share, up from 13 sen in FY14, giving shareholders decent yield of 3.2%. The entitlement date for final and special dividends totalling 10 sen is yet to be announced. 

With dividend payout ratio at just 31% of net profit, there is room to further raise dividends. Magni-Tech has no debt and is sitting on net cash of RM100.1 million — on the back of modest capital expenditure and steady cash flow from operations. 

Magni-Tech derived roughly 80% of its sales from Nike with the balance coming from relatively stable packaging business. We expect growth momentum to continue to be driven by Nike, which has seen a strong growth over the years.

ROE has been on the rise, from 11.4% in FY11 to 21.7% in FY15. Valuations too are undemanding at a trailing 12-month P/E of 8.9 times, compared with smaller peer Prolexus’ 13.1 times. The company also proposed a 1-for-2 bonus issue to boost share liquidity.