By SHAZNI ONG / Pic By TMR File
THE rising cost of manufacturing and complications arising from the trade war provides new opportunities for Malaysian electronic manufacturing services (EMS) players to increase their customer base, which would subsequently benefit MTAG Group Bhd, analysts observed.
Inter-Pacific Research Sdn Bhd, in its initiating coverage report on the company, noted MTAG is a major supplier of labelling and adhesive solutions in the EMS supply chain and is well positioned to benefit when EMS players secure new customers following the US-China trade tensions.
“MTAG, one of the leading printed labels suppliers in the EMS ecosystem, will benefit from the trade war and enjoy organic growth from the regional markets.
“We recommend ‘Buy’ with a fair value of 62 sen pegged to 12 times price-earnings ratio on its financially year 2020 (FY20) earnings per share offering an upside of 21%,” it stated yesterday.
The research firm gave the recommendation given MTAG’s growth upside from the EMS sector, organically and via new sector players, and the two-fold capacity expansion for the printing of stickers and labels.
“Risks to our call include slowdown in consumer electronics, customer concentration risk and unfavourable foreign workers policy going forward,” it said.
According to an independent market report by Protege Associates Sdn Bhd, the local label printing and converting industry in 2019 is estimated to be worth RM5.92 billion and is projected to grow at a compound annual growth rate of 8.2% to RM8.11 billion by 2023.
Inter-Pacific added that discussions with the MTAG’s management revealed demand for EMS remains resilient.
“Subsequently, due to capacity constraint in its converting division (label printing and mesh converting operations) and lack of machinery space, its management has moved part of its existing warehouse to a rented warehouse.
“The area that is freed up is being turned into production space to house additional capacity for converting operations to cater to higher demand from existing key customers such as VS Industry Bhd, SKP Resources Bhd and ATA IMS Bhd, who are in turn, contract manufacturers for a renowned global household appliance maker,” it said.
The firm added that MTAG is exploring to expand its customer base to various industries for its converting services.
In 2017, the group undertook mesh converting product development for its key customer and became the sole provider.
The group will also look into the possibility to expand its services to include some sub-contracting services to further add value to its customers.
As for capacity expansion, the group is planning to construct a new plant comprising corporate office, warehouse and production facility at a location to be identified in Johor. The new plant is slated for completion in the next three years, Inter-Pacific noted.
MTAG is a printing and materials converting specialist and has the capability to convert a variety of materials such as adhesive tapes and papers, mesh, plastics, foams and metals into predefined shapes and sizes.
On earnings forecasts, Inter-Pacific stated its FY20 and FY21 figures of RM35.2 million and RM37.8 million represents a growth of 6.7% and 7.5% respectively, on the back of organic growth for MTAG customers.
“Our forecast excludes the upcoming new production facility and opportunities opened up by the US-China trade war.
“MTAG’s margins are relatively high compared to other printing industry peers due to value-added converting solution services, and to a certain extent, the benefit of lower depreciation cost and low interest expense.
“The group’s 20% net profit dividend policy translates to 1.1 sen per share in FY20-FY21, a dividend yield of 2.2%,” the research report revealed.
Last month, MTAG’s debut on the ACE Market ended on a sour note with an early price premium, triggering profit taking to the point the company’s share price ended well below its listing offer price at the end of its maiden trading day.
The Johor-based printing and manufacturing company raised RM72.3 million from its initial public offering.
MTAG will use RM33 million for the acquisition of a 10-acre (4.056ha) land for the construction of its new manufacturing plant.
Another RM13 million is allocated for capital expenditure involving the purchase of 11 new machinery, which will boost its annual production of labels and stickers to 636 million pieces from the current capacity if 324.5 million pieces.
The remaining RM10 million will be used to repay bank borrowings and RM12.5 million spent for working capital purposes.