PUBLIC INVESTMENT BANK PublicInvest Research Non-Rated Note Tuesday, April 19, 2016 KDN PP17686/03/2013(032117) MAGNI-TECH INDUSTRIES Fair Value: RM5.08 DESCRIPTION Is involved in manufacturing and sales of garments and packaging business 12-Month Fair Value Current Price RM5.08 RM4.23 Market Main Sector Textile Bursa Code 7087 Bloomberg Ticker MTI MK Shariah-compliant Yes SHARE PRICE CHART 4.80 4.60 4.40 4.20 4.00 3.80 3.60 3.40 3.20 3.00 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 52 Week Range (RM) 2.06-4.64 3-Month Average Vol ( 000) 129.6 SHARE PRICE PERFORMANCE Absolute Returns Relative Returns KEY STOCK DATA 1M 3M 6M -4.5-6.6 21.1-5.7-11.1 18.5 Positive On Mid-Term Outlook We see positive things for Magni-Tech Industries over the next 2 years, premised on i) higher sales target set by Nike Inc, ii) the company being a key beneficiary under the Trans Pacific Partnership Agreement (TPPA) deal and iii) a robust capacity expansion from 35m pieces to 50m pieces in the next 4 years. Meanwhile, the company is also trading at an undemanding valuation of 9x FY16 annualised PER, which we deem not justifiable given its i) positive industry outlook, ii) strong balance sheet and iii) established track record. Background. 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 involved in the original equipment manufacturing (OEM) for a number of reputable brands such as Nike, Lacoste, Patagonia and Columbia Sportswear. Magni-Tech is also the largest of Nike s OEMs in Malaysia for apparel products. It specializes in woven sportswear ranging from jackets, pants and warm-up suits. Apparel sales made up 86% of the Group s 9MFY16 revenue while the remainder came from the packaging segment, which includes 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 35.6m pieces per annum with a utilization rate of 70%. It plans to expand its capacity to 50m pieces by 2020. Solid balance sheet. The Group has zero debt with a total cash holding of RM86m, and another RM45m invested in quoted unit trust investments. Operating cash flow has been steady over the last 5 years. Given the minimal capital expenditure required going forward for phase 1 and phase 2 expansions and stronger cash flow position, we believe there is room for higher dividend payouts (currently adopts dividend payout policy of 30%- 35%). Market Capitalisation (RM m) No. of Shares (m) MAJOR SHAREHOLDERS Tan Poay Seng KP Holdings Sdn Bhd Juara Sejati Sdn Bhd Research Team T 603 2268 3000 F 603 2268 3014 E research@publicinvestbank.com.my 683.5 162.7 % 18.2 13.0 12.2 Upbeat earnings outlook. Riding on the capacity growth of 37% over the next 4 years and removal of tariffs under the TPPA deal in 2018, we expect apparel sales to increase 5%-10% per annum over the next 4 years. 9MFY16 core earnings of RM52m has already surpassed FY15 earnings by 11%, buoyed by i) favourable US dollar movements, ii) better sales orders and iii) stronger earnings margin. KEY FORECAST TABLE FYE April (RM m) 2012A 2013A 2014A 2015A 9M2016 CAGR Revenue 534.1 565.8 651.3 716.4 660.0 7.6% Gross Profit 77.4 90.3 96.2 113.6 67.5 10.1% Pre-tax Profit 40.8 48.0 55.5 69.4 83.3 14.2% Core Net Profit 30.6 35.8 42.0 47.0 52.3 11.3% EPS (Sen) 18.8 22.0 25.8 32.1 32.1 14.3% P/E (x) 22.5 19.2 16.4 13.2 9.9 DPS (Sen) 9.0 13.0 13.0 15.0 13.0 Dividend Yield (%) 2.1 3.1 3.1 3.5 3.1 estimates 1 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 1 of 8
Background Established since 1997 Listed in 2000, the company was initially involved in the packaging business before diversifying into apparels. The Penang-based Tan family collectively own more than 40% in the company followed by Permodalan Nasional Berhad with a 7.4% stake acquired from Tan Sri Dato Seri Vincent Tan on 13 January this year. The company is helmed by Mr. Tan Poay Seng, who has been the Managing Director since 2000. Figure 1: Magni-Tech s Corporate Structure Mainly involved in apparel and packaging businesses Business Review Magni-Tech has 2 core businesses, namely, i) packaging and ii) garments. As at 9MFY16, the garment business made up 86% of the Group s revenue. Garment. The Group s garment business is undertaken by its wholly-owned subsidiary, South Island Garment, which has its manufacturing facilities in Seberang Prai, Penang. Besides that, it also operates through contract manufacturing facilities in Vietnam through a joint collaboration with a local partner. The Group has an annual capacity of 35.6m pieces and plans to expand its capacity to 50m pieces by 2020. Vietnam s manufacturing plants account for 91% of its total capacity. It is the original equipment manufacturer for a number of reputable brands, namely, Nike, Lacoste, Columbia and Patagonia. Nike accounts for about 96% of the total garment sales. Magni-Tech derives close to 51% of its sales from the US followed by Europe at 38%. The Group plans to add 6m pieces capacity with an addition of 29 production lines in the next 2 years under the phase 1 expansion plan. Another 6m pieces capacity will come on-stream under the phase 2 expansion plan. Phase 1 is expected to be ready by June 2017, costing USD10m. Phase 2, expected to cost about USD8m will be undertaken on a joint venture basis. Packaging. The packaging business is undertaken by three subsidiaries, namely, South Island Plastic S/B (packaging segment), Inter-Pacific Packaging S/B (corrugated packaging) and South Island Packaging (offset printing packaging). The packaging products are mainly catered to the manufacturing sectors such as food, beverage, healthcare, rubber-based, consumer household, and electronic sub-segments. 2 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 2 of 8
Figure 2: Notable Brands Under Magni-Tech Figure 3: Sales Breakdown (By destination) Asia, 11% 89% of its sales derived from US and Europe regions Europe, 38% US, 51% Apparel earnings made up 92% of total earnings Figure 4: Earnings Breakdown Manufacturing and sales of packaging materials 8% Manufacturing and sales of garments 92% 3 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 3 of 8
Financial Highlights Net cash of RM86m and RM45m invested in the quoted unit trust product Dividend payout policy: 30%-35% The company had consistently produced good financial performances since 2006 with an encouraging CAGR of 55% per annum while earnings margin has also improved gradually from the low single-digit to 12% today. As at 9MFY16, the company has registered a pre-tax profit of RM83m, which has already surpassed FY15 earnings by 20%. Earnings growth was powered mainly by the favourable USD dollar movement and higher sales orders secured from Nike, which has also been reflected on its annual earnings uptrend since 2009. Solid balance sheet. As at 9MFY16, the Group has zero debt with a total cash holding of RM86m, and another RM44.6m invested in quoted unit trust investments. Meanwhile, its operating cash flow is has been consistently strong with a net cash generation of RM30m-50m per annum. Consistent dividend payment. Management is adopting a 30%-35% dividend payout policy for the company, but has in fact declared more than 45% payout over the last 5 years. Consecutive rising in earnings since 2006 Figure 5: Historical Pre-tax Earnings Trend RMm 90 80 70 60 50 40 30 20 10 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 9M2016 (%) 14 12 10 8 6 4 2 0 Figure 6: Breakdown of Costs About 55% of its raw material costs is in US dollar labour, 10% Others, 15% manufacturing, 20% Raw material, 55% 4 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 4 of 8
Growth Drivers: i) Football fever will further boost garment sales. UEFA European Championship, the 2 nd most watched football tournament in the world after the World Cup, which will be held in mid-june this year, is expected to boost shirt sales by the millions as this sports event drew more than 300m viewers worldwide in the previous round. Short-term: football fever sales Mid-term: capacity expansion and benefitting under the TPPA deal ii) 37% capacity expansion coming on-stream. In tandem with the new orders, Magni-Tech is currently expanding its group production capacity by 37% with an addition of 58 production lines in Vietnam. Construction on the phase 1 capacity expansion will commence in September and is expected to be completed by June 2017 while the 2 nd phase will start in 2018. The expansion will increase the capacity by 15m pieces per annum and costing about USD18m (RM72m) in total for the JV-owned entity. iii) Benefitting from TPPA deal. As Malaysia and Vietnam are part of the TPPA nations, Magni Tech s textile business will fully enjoy tariff exemptions for its garment exports to the US, which currently contributes 85% of its textile sales. According to the Department of Statistics Malaysia, garment exports totaled RM5.3bn in 2014. TPPA markets contributed 59% market share with the US alone making up 34% of the total export demand. According to a recent PwC study, a 10% import duty reduction in US across all garment product types is likely to result in RM190m worth of savings, which could potentially churn out into more orders from importers. As 96% of Malaysian exports to US are apparel and made-up garments, whereby its existing tariffs are as high as 20%, the potential savings could be even greater. Meanwhile, the Vietnamese textile industry, which contributes an annual USD20bn (RM80bn) turnover, accounts for 15% of the country s GDP. Under the TPPA, Vietnam would see a tremendous jump in garment and textile exports to the US from USD9bn to USD30bn by 2020, a whopping growth of 250%. In addition, it will also increase Vietnam s textile and garment share to 12%-13% (up from 8%-9%) in the US market once the existing tariff of 17% is removed Figure 7: Timeline Growth 1st phase capex: USD10m, expanding capacity by 6m pieces p.a. (JV in Vietnam) 25.7m pieces 30m pieces 35m pieces Current annual capacity: 35.6m pieces (70% utilisation rate) FY16 FY17 FY18 FY19 FY20 27.9m pieces 32m pieces 2nd phase capex: USD8m, expanding capacity by 6m pieces p.a. (JV in Vietnam) 5 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 5 of 8
Figure 8: TPPA markets made up 59% of Malaysian Garment Exports in 2014 Magni-Tech will benefit from the TPPA deal in Malaysia and Vietnam, which will see the cost savings from the import duty passing to the exporters Source: PWC, PublicInvest Research Figure 9: Nike s Earnings Growth Trend Nike s earnings had been on a consecutive uptrend since FY09 USDm 3,500 3,000 2,500 2,000 1,500 1,000 500 0 (%) 14 12 10 8 6 4 2 0 Nike also sets an ambitious target by growing its current sales of USD30bn to USD50bn by 2020, a staggering growth of 66% Source: Bloomberg, PublicInvest Research Nike Inc s apparels are supplied by 408 apparel manufacturers located in 39 countries, amongst which are China, Vietnam, Sri Lanka, Thailand, Indonesia, Malaysia and Cambodia. Nike Inc has registered consistent healthy financial results since FY09 with an average growth of 14% p.a, bolstered by improved contributions from footwear and apparel segments through an increase in comparable store sales, online sales and new addition of stores. Nike has set an ambitious target of expanding its annual sales from USD30.6bn in FY15 to FY50bn by FY20, which is a roughly 10% compounded annual growth rate. 6 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 6 of 8
Risks Foreign currency risk. Given the majority of its sales are derived in US dollar, a reversal in foreign exchange movements could affect its earnings significantly. According to the 2015 annual report, for every 10% change in the US Dollar, the group s pre-tax earnings will be affected by nearly RM5m. Termination or delay in TPPA execution. The long-awaited TPPA deal could see execution delays due to the disagreements on certain negotiations amongst the nations. Meanwhile, Malaysia s Ministry of International Trade and Industry recently mentioned that the TPPA provides an exit clause if Malaysia decides to leave the trade pact and that there will be no penalty imposed. The TPPA has been approved by both legislative houses in Malaysia 2 months ago. Peer Comparison Figure 10: Valuations It will be a rosy outlook for Magni-Tech, MWE and Prolexus in the mid-term under the TPPA deal Company Price Dividend Yield (RM) Mkt Cap EPS (sen) EPS Growth (%) P/E (x) P/B (x) ROE (%) (%) @18 Apr (RMm) 2016F 2017F 2016F 2017F 2016F 2017F 2016F 2017F 2016F 2017F 2016F 2017F Magni-Tech 4.23 688.2 47.6 42.8 48.2-10.0 8.9 9.9 2.1 1.9 24.0 18.9 6.4 5.8 MWE 1.42 328.7 12.6 18.9 12.6 18.9 11.1 7.4 0.5 0.5 4.4 6.2 1.4 1.4 Prolexus 1.80 212.6 31.5-46.5-5.7-1.0 - - - 2.6 - Source: Bloomberg, PublicInvest Research FV: RM5.08 Figure 11: Valuations Sum-Of-Parts Valuations Valuation Basis Value (RMm) RM/share Textile 10x to FY17 696.1 4.28 earnings Investment Securities Quoted Unit 44.6 0.27 trust Net cash/(debt) As at 9MFY16 86.0 0.53 Fair Value (RM/share) 826.7 5.08 No of shares 162.7 Current share price 4.23 Potential upside (%) 20.1 SOP-derived FV of RM5.08. We are using a Sum-of-Parts (SOP) methodology to value Magni-Tech, which yields a fair value of RM5.08, implying a healthy return of 20% from current levels. We applied PER of 10x on the garment business, which is comparable with the industry average PER. Magni-Tech s earnings outlook is expected to be commendable over the next few years backed by two key growth drivers i) capacity expansion in the Vietnamese textile manufacturing plant by 37% and ii) one of the beneficiaries under the participation in TPPA. 7 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 7 of 8
RATING CLASSIFICATION STOCKS OUTPERFORM NEUTRAL UNDERPERFORM TRADING BUY TRADING SELL NOT RATED The stock return is expected to exceed a relevant benchmark s total of 10% or higher over the next 12months. The stock return is expected to be within +/- 10% of a relevant benchmark s return over the next 12 months. The stock return is expected to be below a relevant benchmark s return by -10% over the next 12 months. The stock return is expected to exceed a relevant benchmark s return by 5% or higher over the next 3 months but the underlying fundamentals are not strong enough to warrant an Outperform call. The stock return is expected to be below a relevant benchmark s return by -5% or more over the next 3 months. The stock is not within regular research coverage. SECTOR OVERWEIGHT NEUTRAL UNDERWEIGHT The sector is expected to outperform a relevant benchmark over the next 12 months. The sector is expected to perform in line with a relevant benchmark over the next 12 months. The sector is expected to underperform a relevant benchmark over the next 12 months. DISCLAIMER This document has been prepared solely for information and private circulation only. It is for distribution under such circumstances as may be permitted by applicable law. The information contained herein is prepared from data and sources believed to be reliable at the time of issue of this document. The views/opinions expressed herein are subject to change without notice and solely reflects the personal views of the analyst(s) acting in his/her capacity as employee of Public Investment Bank Berhad ( PIVB ). PIVB does not make any guarantee, representations or warranty neither expressed or implied nor accepts any responsibility or liability as to its fairness liability adequacy, completeness or correctness of any such information and opinion contained herein. No reliance upon such statement or usage by the addressee/anyone shall give rise to any claim/liability for loss of damage against PIVB, Public Bank Berhad, its affiliates and related companies, directors, officers, connected persons/employees, associates or agents. This document is not and should not be construed or considered as an offer, recommendation, invitation or a solicitation of an offer to purchase or subscribe or sell any securities, related investments or financial instruments. Any recommendation in this document does not have regards to the specific investment objectives, financial situation, risk profile and particular needs of any specific persons who receive it. We encourage the addressee of this document to independently evaluate the merits of the information contained herein, consider their own investment objectives, financial situation, particular needs, risks and legal profiles, seek the advice of their, amongst others, tax, accounting, legal, business professionals and financial advisers before participating in any transaction in respect of any of the securities of the company(ies) covered in this document. PIVB, Public Bank Berhad, our affiliates and related companies, directors, officers, connected persons/employees, associates or agents may own or have positions in the securities of the company(ies) covered in this document or any securities related thereto and may from time to time add or dispose of, or may be materially interested in, any such securities. Further PIVB, Public Bank Berhad, our affiliates and related companies, associates or agents do and/or seek to do business with the company(ies) covered in this document and may from time to time act as market maker or have assumed an underwriting commitment in the securities of such company(ies), may sell them or buy them from customers on a principal basis, may have or intend to accommodate credit facilities or other banking services and may also perform or seek to perform investment banking, advisory or underwriting services for or relating to such company(ies) as well as solicit such investment advisory or other services from any entity mentioned in this document. The analyst(s) and associate analyst(s) principally responsible for the preparation of this document may participate in the solicitation of businesses described aforesaid and would receive compensation based upon various factors, including the quality of research, investor client feedback, stock pickings and performance of his/her recommendation and competitive factors. Hence, the addressee or any persons reviewing this document should be aware of the foregoing, amongst others, may give rise to real or potential conflicts of interest. Published and printed by: PUBLIC INVESTMENT BANK BERHAD (20027-W) 9 th Floor, Bangunan Public Bank 6, Jalan Sultan Sulaiman 50000 Kuala Lumpur T 603 2268 3000 F 603 2268 3014 Dealing Line 603 2268 3129 8 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 8 of 8