MTAG Group Bhd
(Dec 4, 57.5 sen)
Initiate buy with a target price of 75 sen: We like MTAG Group Bhd for its: i) position as a key label and sticker printing supplier as well as a mesh material converter for a global household appliance brand; ii) strong barrier to entry via its technical expertise in the niche printing and converting industry for the electrical and electronics industry in the last 23 years; iii) expected solid earnings growth — a compound annual growth rate (CAGR) of 13% in the financial year ended June 30, 2019 (FY19) to FY22, led by a targeted doubling of its existing capacity in the next three years; iv) less labour-intensive nature of its business; and v) attractive valuation of 10 times estimated FY21 (FY21E) price-earnings ratio (PER) and an above-average return on equity of 22%.

 
Approximately 80% of MTAG’s revenue is contributed by electronics manufacturing services companies, namely ATA IMS Bhd, VS Industry Bhd and SKP Resources Bhd, which serve an indirect key customer.

MTAG plans to construct a new integrated manufacturing plant and purchase new machinery to double its capacity gradually over the next three years. This would enable the group to cater to growing demand of its existing customers, capture a larger share of the industry and improve efficiencies.

We expect MTAG’s growth to be supported by its indirect key customer’s new product introductions and application of higher-end materials, riding on the latter’s ambitious plans, aggressive research and development road map as well as innovation and growth prospects.

We believe MTAG’s earnings prospects are good and project the group to record a three-year core net profit CAGR of 13% for FY19 to FY22, driven by organic growth of its indirect key customer’s existing products, the introduction of new products or upgraded versions of existing products of its indirect key customer, and potential new customers as a result of diversification opportunities on the back of trade-tension diversion.

Moreover, given the technological advancement, we see a trend as the indirect key customer introduces higher-priced products, with new features and technology, using higher-end materials that are of superior quality. We believe this development should bode well for MTAG.

Currently trading at only 10 times FY21E PER, we believe the valuation looks appealing given its solid fundamentals, relatively high margin versus its peers, low labour intensity requirements and high stock liquidity. — Affin Hwang Capital, Dec 4