This article first appeared in The Edge Financial Daily on September 14, 2018

Magni-Tech Industries Bhd
(Sept 13, RM4.82)
Maintain outperform with higher target price (TP) of RM6.45: Magni-Tech Industries Bhd reported lower revenue of RM273.7 million (-6.8% y-o-y) and lower core net profit of RM20.5 million (-3.4% year-on-year [y-o-y]) in the first quarter ended July 31, 2018 (1QFY19), the weaker performance mainly due to lower garment sale orders received.

Note that 1Q is seasonally a weaker quarter, only making up an average of 19.4% of full-year earnings based on past 5 years’ quarterly data. Hence, the results are within our expectations at 19.5% of our full-year estimates.

Magni-Tech declared a higher dividend of five sen per share for 1QFY19 (1QFY18: 3.5 sen). Our sum of parts-based TP is raised to RM6.45 from RM6.40 previously as we roll over our valuation matrix to CY19F. Our “outperform” call is maintained.

The stock currently trades at 6.7 times CY19 price earnings ratio at core earnings level with a net cash position of RM229 million or RM1.41 per share as at July 31, 2018 while dividend yields are attractive (FY19F: 4.2%).

The group’s largest contributor — garment — slipped by 7.6% y-o-y in 1QFY19 due to lower sale orders received. Packaging revenue, on the other hand, was higher by 1.2% y-o-y in 1QFY19 due to higher volumes.

Despite lower revenue, garment’s operating profit grew by 15.4% y-o-y, mainly boosted by higher forex gain (RM2.9 million), lower operating expenses to revenue ratio resulting from productivity improvements as well as higher income from investment in money market unit trusts.

Meanwhile, the packaging division’s operating profit increased by 4.8% y-o-y due to higher revenue. Overall, reported net profit grew 12.4% y-o-y mainly due to forex gain in 1QFY19.

Excluding the forex gain, core net profit slipped 3.4% y-o-y. On a brighter note however, core net profit margin improved by 0.3 percentage point to 7.5% in 1QFY19.

To recap, new plant 1 has commenced operations since mid-March this year, while new plant 2 is currently under construction and expected to commence operations in mid-2019.

Given the group’s strong net cash position of RM229 million or RM1.41 per share (which represents 30% of its market capitalisation), we do not rule out the possibility of merger and acquisition exercises in the future. — PublicInvest Research, Sept 13