As at 5 September 2018, Magni-Tech Industries Bhd (Magni-Tech) is trading at RM 4.80 a share. It is 36.8% decline from RM 7.60 recorded on 4 August 2017.
Source: Google Finance
You may ask:
- Why is there a massive decline in Magni-Tech’s stock price?
- How to avoid buying Magni-Tech at RM 7.60 on 4 August 2017?
- Should I dismiss Magni-Tech as an investment?
- Or, should I grab it now at RM 4.80 a share?
First, I believe it is important to define what a good investment is in the stock market. Different individuals would have different beliefs and views on it and thus, would invest differently. As such, please allow me to share what a good stock investment is:
Good Investment = (1) Good Stock + (2) Good Price
For a start, a good stock is one that grows profits consistently. It is one which is capable of compounding wealth to shareholders over the long-term. Ideally, an investor would want to accumulate these stocks at their lowest possible prices. Thus, in this case, I would assess:
- Is Magni-Tech a good stock where its fundamentals are still intact?
- Is RM 4.80 a good price to consider an investment in Magni-Tech?
Therefore, here are 7 things to know about Magni-Tech before you invest:
#1: The Business
Magni-Tech derives income from two business segments:
First, it manufactures garments and supplies them mainly to Nike Inc. where the end-products are distributed worldwide where its markets include the United States, Europe, and China. This segment has made RM 973.8 million in revenue and RM 107.4 million in segment profits, thus, is the main contributor of income to Magni-Tech in 2018.
- Packaging Materials
Second, it manufactures flexible packaging materials and corrugated cartons to manufacturers in the food & beverage, healthcare, rubber based, consumer household, and electronic sectors. In 2018, it made RM 106.1 million in revenue and RM 4.1 million in segment profits, a less significant contributor of income to Magni-Tech.
#2: The Markets
In 2018, Magni-Tech has derived 90% of its total revenues from export sales. It shipped its products to the following markets:
Source: Annual Report 2018 of Magni-Tech Industries Bhd
#3: The Financials
Here, I’ll present two observations of Magni-Tech’s financial results:
Magni-Tech has achieved growth in revenues and profits over the last 10 years. Revenues have grown from RM 388.1 million in 2009 to RM 1.14 billion in 2017 before dipping slightly to RM 1.08 billion in 2018. This, in turn, had led earnings to increase from RM 11.5 million in 2009 to as high as RM 120.7 million in 2017 before recording a decline to RM 91.4 million in 2018.
Source: Annual Reports of Magni-Tech Industries Bhd
So, why is there a ‘Crash’ in Magni-Tech’s stock price? First, let us compare the chart of Magni-Tech’s earnings with its stock price chart:
Source: Google Finance
Evidently, the two graphs had projected the same pattern. It has mirrored each other. Growth in profits had led to Growth in stock prices. Meanwhile, a Fall in profits had led to a Fall in stock prices. Here was what I learnt after reading the annual report 2017 & 2018 of Magni-Tech and a study of its financial results & its stock price performances during the period:
In 2017, Magni-Tech had recorded an exceptional year when it had recorded a huge jump in sales and profits from 2016. This is due to substantial increase in orders received in 2017 and strengthening of the US Dollar against the Ringgit in that year. This had caused a steep climb in its stock price in 2017.
In 2018, Magni-Tech had received lower orders as compared to 2017 levels. It was impacted by the weakening of the US Dollar against the Ringgit. Thus, the manufacturer had reported a substantial decrease in both revenue and profits from 2017 levels. Thus, it has caused a substantial fall in its stock price in 2018.
USD:MYR Exchange Rate:
#4: The Balance Sheet Strength
As at 30 April 2018, Magni-Tech is zero-geared and has RM 50.0 million in cash reserves. It has a current ratio of 5.36. Thus, Magni-Tech had maintained itself a healthy balance sheet.
#5: Major Risks
In 2018, Magni-Tech derived 83.7% of its total revenues from Nike Inc, its key customer. Thus, a change in orders received from Nike Inc would have a great impact on Magni-Tech’s financial results in the future. In addition, with it, the manufacturer would continue to face the risk of foreign exchange volatility as its transactions are predominantly in the US Dollar.
Magni-Tech has operations in Vietnam. Effective 1 January 2018, the minimum wage in Vietnam would rise by an average of 6.5% and thus, would raise labour cost in its Vietnam operations. This would impact negatively to Magni-Tech.
#6: Future Prospects
In 2018, Magni-Tech has spent RM 7.3 million in machine upgrades where new machineries are acquired to replace obsolete ones in its packaging business.
Apart from the above, there is no other material developments revealed by the board of Magni-Tech in respect to their future prospects.
There are several measures to evaluate Magni-Tech as an investment at stock price of RM 4.80 a share:
- P/E Ratio
In 2018, it had recorded RM 0.561 in earnings per share (EPS). Hence, Magni-Tech’s current P/E Ratio works out to be 8.56, above its highest P/E Ratio of 8.51 achieved over the last 10 years.
- P/B Ratio
In 2018, it has recorded RM 2.86 in net assets a share. Thus, its current P/B Ratio is 1.68, comparable to its 5-Year P/B Ratio average of 1.65.
- Dividend Yields
In 2018, it paid out RM 0.20 in dividends per share (DPS). If it is able to maintain DPS at RM 0.20 in 2019, its dividend yields is 4.16% which is a fraction lower than its 5-Year average of 4.24%.
#8: How to Avoid Buying Magni-Tech at RM 7.60 on 4 August 2017?
The latest financial results recorded would be for year 2017. Thus, at RM 7.60 a share, Magni-Tech was trading at:
- P/E Ratio
In 2017, it recorded EPS of RM 0.738. Thus, its P/E Ratio was 10.30, the highest recorded over the last 10 years.
- P/B Ratio
In 2017, it recorded net assets a share of RM 2.51. Hence, its P/B Ratio was 3.03, the highest recorded over the last 10 years.
- Dividend Yield
In 2017, it paid out RM 0.23 in DPS. Thus, its dividend yield was 3.03%, the lowest recorded over the last 10 years.
Highest P/E Ratio, Highest P/B Ratio, and Lowest Dividend Yields are indicators which had clearly pointed that Magni-Tech’s stock price at RM 7.60 a share was trading at its highest and thus, was the least ideal time to buy its shares.
#9: VIA’s Verdict
Magni-Tech has delivered strong sets of financial results over the last 10 years. It has a strong balance sheet with zero debt and RM 50 million in cash balance, thus, allowing the company to continue paying dividends to its shareholders in the near future.
The uncertainty lies within its major customer, Nike Inc as it has derived 83.6% of total revenues in 2018 from Nike Inc alone. In addition, there are not much discussions provided on its future prospects and thus, investors would need to rely on past results and own judgement to make a decision on Magni-Tech.
Presently, the price point at RM 4.80 is more attractive compared to RM 7.60 a year ago. At minimum, if Magni-Tech maintains its DPS at RM 0.20, an investor would receive 4.16% in dividend yield for 2019. P/E Ratio at 8.56 is relatively a low figure compared to other stocks listed on Bursa Malaysia.
So, to buy or not to buy, the answer lies in, whether or not, you are okay with:
- Strong Past Financial Results
- Strong Balance Sheet with RM 50 million in Cash
- Dividend Yield of 4.16%
- P/E Ratio of 8.56
- Not Much Discussed about Future Prospects