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This article first appeared in The Edge Financial Daily, on October 2, 2015.

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 Riding on Nike’s success

Shares for Magni-Tech Industries Bhd (Fundamental: 2.8/3, Valuation: 2.4/3) have done very well over the past one year. InsiderAsia first recommended the stock in late-October 2014 when the share price was RM2.85. Since then, the company has reported consecutive quarters of strong earnings results — and this was reflected in its stock price performance (see chart 1).

We featured the stock again on Wednesday. Co-incidentally, the company announced the ex-entitlement date (November 5) for its proposed final and special dividends of 10 sen. Magni-Tech’s share price closed at an all-time high of RM5.60 yesterday. 

The company is a contract manufacturer for global sportswear leader Nike, which contributes the bulk of its sales and earnings. Looking ahead, we expect it to continue to benefit from Nike’s strong growth momentum.

Indeed, investors are very bullish on the American sportswear giant’s prospects if the stock’s performance is any guide. Shares for Nike rallied to a record high of US$125 after the company posted stellar 1QFYMay16 results last week. The earnings handily beat analysts’ expectations. 

Net income rose 23% y-y to US$1.2 billion, marking Nike's fifth straight double-digit quarterly earnings growth on the back of a 5% increase in revenue. Excluding the effects of the stronger USD, revenue climbed 14% with worldwide future orders up 17%.

Notably, sales from Greater China were up an amazing 30%, reflecting the strength of its brand name in the world’s second largest economy. Commenting on its growth prospect in China, management stated that “its brand has never been stronger and its marketplace has never been more healthy”.

For the past 5 years, Nike’s sales grew at a compound annual growth rate (CAGR) of 10.1%, from US$20.9 billion in FY2011 to US$30.6 billion in FY2015. During the same period, net income increased at a CAGR of 11.3%, from US$2.1 billion to US$3.3 billion (see chart 2). 

Its robust double-digit growth has not gone unnoticed — its shares more than tripled in price in just 5 years (see chart 3). Out of the 33 analysts polled by Bloomberg, 25 analysts rate the stock a Buy while 7 rate it as a Hold. 

Nike outsources most of its production to various independent contract manufacturers outside the US, mostly in Asia. As such, Nike’s upbeat outlook bodes well for its suppliers who are likely to expand to cater for the growing sales orders.  

Aside from Magni-Tech, Prolexus Bhd (Fundamental: 2.1/3, Valuation: 1.5/3) is another locally-listed contract manufacturer for Nike. 

While Magni-Tech is sitting on a larger cash pile and pays higher dividends, Prolexus is set to offer higher growth potential given its aggressive capacity expansion plan and lower earnings base.  

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