This article first appeared in The Edge Financial Daily, on April 20, 2016.

Magni-Tech Industries Bhd
(April 19, RM4.24)
Not rated with fair value (FV) of RM5.08: We see positive things for Magni-Tech Industries over the next two years, premised on higher sales target set by Nike Inc, the company being a key beneficiary under the Trans-Pacific Partnership (TPP) agreement deal and a robust capacity expansion from 35 million pieces to 50 million pieces in the next four years. Meanwhile, the company is also trading at an undemanding valuation of nine times financial year 2016 (FY16) annualised price-earnings ratio (PER), which we deem not justifiable given its positive industry outlook, strong balance sheet and an established track record.

Magni-Tech was established in 1997 and listed on Bursa Malaysia’s Second Board in 2000. The company, under the control of the Tan family, was initially involved in the packaging business before diversifying into apparels. Similar to MWE Holdings Bhd and Prolexus Bhd, Magni-Tech is an original equipment manufacturer (OEM) for a number of reputable brands such as Nike, Lacoste, Patagonia and Columbia Sportswear.

Magni-Tech is also the largest OEM for Nike in Malaysia for apparel products. It specialises in woven sportswears ranging from jackets, pants to warm-up suits. Apparel sales made up 86% of the group’s nine months ended Jan 31, 2016 (9MFY16) revenue while the remainder came from the packaging segment, which included corrugated packaging and offset printing packaging. Nearly 96% of its apparel sales are derived from Nike Inc. The group plans to diversify into more brands to increase its non-Nike contribution to 20% by 2018. Currently, the group has an annual capacity of 35.6 million pieces with a utilisation rate of 70%. It plans to expand its capacity to 50 million pieces by 2020.

The group has zero debt with a total cash holding of RM86 million and another RM45 million invested in quoted unit trust investments. Operating cash flow has been steady over the last five years. Given the minimal capital expenditure required going forward for phase-1 and phase-2 expansions and its stronger cash flow position, we believe there is room for higher dividend payouts (the group currently adopts a dividend payout policy of 30% to 35%). Riding on the capacity growth of 37% over the next four years and removal of tariffs under the TPP agreement deal in 2018, we expect apparel sales to increase 5% to 10% per annum over the next four years. Its 9MFY16 core earnings of RM52 million have already surpassed FY15 earnings by 11%, buoyed by favourable US dollar movements, better sales orders and stronger earnings margin.

We are using a sum-of-parts methodology to value Magni-Tech, which yields an FV of RM5.08, implying a healthy return of 20% from current levels. We apply PER of 10 times on the garment business, which is comparable with the industry average PER. — PIVB Research, April 19