Target price for Magni-Tech revised

PETALING JAYA: Inter-Pacific Research Sdn Bhd has reiterated its “neutral” call on Magni-Tech Industries Bhd with a revised target price of RM6.89 (11.9% upside) based on sum of parts (SOP) valuation.
Magni-Tech closed 0.33% higher at RM6.18 yesterday, with some 987,000 shares traded. Its market capitalisation stood at RM1.01 billion.
“While we continue to assume top line to grow marginally for FY18/19, we are making revisions to our earnings forecast as we understand the business environment is expected to be challenging for the forthcoming quarters,” its analyst Brian Yeoh said in a report.
He said the research house remains cautious on the group’s earnings growth as its top customer Nike was affected by a sluggish US retail sector, slow US apparel sales and rising competitive pressures from Adidas and Under Armour, as well as exposure to the US dollar.
Nonetheless, Yeoh said it continues to favour Magni-Tech for its commendable track record, expected earnings growth riding on Nike, capacity expansion set for completion by FY19 and a strong cash position.
Despite achieving a higher turnover of RM293.7 million, the group registered core earnings of only RM20.9 million during the first quarter ended July 31, 2017 (Q1 FY18).
Yeoh said the group’s Q1 FY18 results were below the research house’s and consensus expectations, accounting for 17.3% and 17.8% respectively due to lower-than-expected margins.
Aside from a forex loss of RM1.32 million, the group’s profit before tax (PBT) margin was eroded by higher operating expenses due to higher minimum wages in both Malaysian and Vietnamese operations as well as higher raw material costs for the corrugated packaging business.
Furthermore, he said, minimum wages in Vietnam were increased by 7.3% in July 2017 and is expected to see another round of wage hike (6.5%) coming into force in early 2018.
“We understand from an apparel industry website, Fibre2Fashion that the rise may raise production costs up between 1.15-1.2% in labour-intensive sectors like textile and garments.
“Separately, a first interim dividend of 3.5 sen was declared, currently below our expectation at 15% of financial year ended April 2018 dividend,” Yeoh said.