Magni-Tech Industries Bhd
(Aug 6, RM4.20)
Recommend trading buy with future value of RM5.15. While we were unable to access Magni-Tech Industries Bhd (Magni) management for more information, we noted many similarities to another garment manufacturer PRLexus Bhd (PRLexus) which we recently issued a “trading buy” recommendation target price of RM3.15 at 10 times financial year 2016 forecast (FY16F) price-to-earnings ratio.

We like Magni as a proxy to Nike’s growth trajectory and a consumer play which is relatively unscathed by the weak local landscape.

The garment segment makes up 83.2% of FY15 revenue which we gather is mostly derived from Nike, which it has been dealing with since 1985.

Magni has been enjoying steady positive earnings growth over the last 10 years with a three-year historical average growth of 20% (up to FY15).

Since the demand is internationally driven, they will be spared from the weak local landscape. The remaining business is mainly in the relatively stable packaging segment.

Magni’s set-up is similar to PRLexus where Nike is also the top contributor, but PRLexus has a much higher three-year historical average earnings growth rate of 49% due to its lower base effect, while we understand that PRLexus has been expanding its capacity.

Cotton prices have stabilised at its three-year low levels (currently at US$65.4 [RM254.40] per pound (lb) since the peak in 2011 of more than US$200 per lb.

This has helped the group to mitigate recent challenges, resulting in the group achieving uninterrupted margin expansion until today.

In PRLexus’ case, it is a net positive beneficiary of the strengthening US dollar against the ringgit where a 5% increase in the exchange rate will increase its bottom line by 8% to 10%.

Net margins have improved 3.5 percentage points to 7.5% since 2011, and are also comparable or slightly better than PRLexus’ 6.3% in FY14. Note that Magni’s FY16F return on equity of 19% is also comparable to PRLexus’ 17%.

Magni is in a strong net cash position with no borrowings and it paid out 35% as dividends with the last two-year historical yields at 3% to 3.2%.

PRLexus is also in a net cash position but has some borrowings and only paid out less than 15% over the last two years (historical yields: 1.5% to 2.3%).

Magni’s FY16F net margins of 7.4% will be better than PRLexus’ 5.3%, as the latter’s expansionary cost will only normalise in 2017.

We estimate FY16F dividend yield of 4.2% based on 35% payout.

While Magni’s market cap is 66% higher than PRLexus’, note that Magni is less liquid.

Recently, we pegged PRLexus’ valuation at 10 times and based on the above arguments, we believe that Magni deserves the same as well. — Kenanga Research, Aug 6

This article first appeared in digitaledge Daily, on August 7, 2015.