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Friday, January 26, 2018

Magni-Tech Industries Berhad - Value Emerged On Share Price Weakness

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Since December 2017, Magni-Tech’s share price has tumbled 15.5% on weaker 2Q earnings, concern over the higher operating costs as well as the strengthening of ringgit. We think that the market has already priced-in the negative factors concerning the Group’s prospects. Though we remain cautious on the near term outlook given the continuous hike in Vietnam’s minimum wage, we believe the recent selldown of the shares is overdone. At the current price, Magni-Tech offers attractive upside and dividend yield. We upgrade Magni-Tech to Outperform on its share price weakness, undemanding valuation (currently only trading at a forward 8x PE for CY18F core earnings), and solid fundamentals (sitting on a net cash position of RM163.2m as at 2QFY18) with an unchanged SOP-based TP of RM6.40, which corresponds to a forward 10x PE for CY18F core earnings.
  • Minimum wage hike in Vietnam. According to Decree No. 141/2017/ND CP issued by Vietnam government, the minimum wage in Vietnam has been officially increased by an average of 6.5%, effective from 1 January 2018. The minimum wage rates vary across four geographical regions, which cumulatively covering the whole country (refer to Table 1). As mentioned earlier, the continuous hike in Vietnam’s minimum wage is likely to squeeze Magni-Tech’s garment margins as the garment industry is highly dependent on manual labor and the Group derives 95% of its earnings from Vietnam. Our earnings forecast remain unchanged as we have already accounted for the minimum wage hike in our earnings assumptions.
  • Expecting a better FY19F. With the two new manufacturing plants potentially coming on stream in FY19F, we anticipate another round of ramp-up in production capacity in order to meet growing demand for sportswear. We believe that the recovery of the US economy should bode well for the sportswear industry as demand is likely to pick up. Note that the US market accounts for 30% of Magni-Tech’s sales. Though management is tight-lipped on the production timeline and expected contributions, we reckon that full commercial production of the two new manufacturing facilities would be the next re-rating catalyst for the stock, though only in FY19F.
  • Signal of confidence. We note that the Tan family (the Group’s Chairman and Managing Director) had collectively bought 1.9m shares in Magni Tech at a volume weighted average price of RM5.64 (range of RM4.98– RM6.74) in batches since September 2017 after the collapse of share price due to the weaker 1Q earnings. This could be an indication that management is confident in the longer term prospect of the company despite the weaker quarterly results. Furthermore, the current share price is at 10% discount of their volume weighted average price over the last five months.
  • A key downside risk to our call is a greater-than-expected negative impact from the minimum wage hike, resulting in further margin compression. Our worst-case scenario – if the minimum wage hike impact is greater than we expected with margins compressed further, the core earnings could potentially be lower by 20% for FY18-19F and Magni-Tech would be valued at RM5.23, which is still above its current price of RM5.08. With regards to forex risk, our in-house forecast expects Ringgit to average at RM4.00-RM4.10 against USD in 2018, hence we see minimal risk for Ringgit to strengthen further from the current level. Besides, the foreign exchange mechanism implemented by Magni-Tech’s key customer for the purpose of regulating and protecting independent contractors’ margins should help to normalise Magni-tech’s margins over a longer period of time.
Source: PublicInvest Research - 26 Jan 2018

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