KUALA LUMPUR: Kenanga Investment Bank Research has recommended investors to take profit on Magni-Tech Industries as the share price is now fully valued.
“We have upgraded its fair value (FV) to RM6.30 (ex-bonus FV: RM4.20) based on 12.0 times price-to-earnings ratio (previously 10 times) applied on CY16E EPS of 52.5 sen,” it said on Thursday.
The research house said since its previous Trading Buy recommendation on Magni-Tech when the share price was at RM4.34 on Aug 6, the stock has performed well, appreciating by 35%.
The shares strongly outperformed the benchmark KLCI which declined by 0.5% to 1,686.51.
In fact, Magni-Tech recently hit a new high of RM5.80 on Oct 20, before profit taking kicked in.
“Positives already priced in? On Sept 9, Magni-Tech proposed to undertake a bonus issue of up to 53.2 million shares on a basis of one bonus share for every two existing Magni shares, with the exercise targeted to be completed by 4Q15.
“Since then, the share price has risen by 32% leading us to believe that the market has priced in the impact of the announcement, as we have seen no substantial changes in their earnings outlook,” it said.
Kenanga Research said the outlook for Magni-Tech outlook remains intact. It expects FY16-17E core earnings growth of 7%-3% based on 5% on-year topline increase.
This will be driven by the strengthening US dollar and its sensitivity analysis indicates a 5% appreciation in US dollar against the ringgit could increase the company’s bottomline by 3%.
Another factor is that stable cotton prices are at three-year’s low level (currently US$63 a pound), compared to the 2011 peak at more than US$200 a lb. This should preserve FY16-17E margins at 7.4-7.3%.
“Given the sharp increase in Magni-Tech’s share price recently, we think investors could consider another garment manufacturer, Prolexus
(Trading Buy; TP: RM3.15 at 10 times FY16E PER), given the strong similarities between the two.
“We prefer Prolexus for: (i) stronger FY16-17E revenue growth at 18% (against Magni-Tech’s 7%), and (ii) capacity expansion in both China and Malaysian operations which we conservatively estimate could increase FY16-17E garment production by 12-16% and boost earnings by 15%-26% to RM23.5mil to RM29.7mil.
“Given our lack of access to its management for more information, we maintain our FY16-17E earnings assumption at RM55.9mil to RM57.5mil for FY16-17E EPS of 51.5 sen to 52.9 sen (ex-bonus EPS: 34.3 sen-35.3 sen).
“Our updated PER implies a 9% premium on peers’ average (11.0 times) reflecting its largest market cap status (RM632mil) among its peers (RM300m).
“Note that our valuation represents a 43% premium to the FBM Small Cap (FBMSC) FY16E forward PER of 8.4 times. We believe the premium is justified by Magni-Tech’s superior ROE of 18% against the FBM Small Cap’s 9% as well as its US dollar-denominated earnings.
“Our updated FV represents limited share price upside of 9%. Hence, we believe Magni-Tech is now fairly valued and recommend investors take profit,” it said.
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