- An increase of 12.6% in their revenue from RM49.08 million to RM55.26 million.
- Profit increases by 66.10% based on the preceding quarter.
- Declare 1 cent dividend and year-to-date the Company dividend yield is at 3.8%.
- Short term view: Smaller upside in terms of share price.
- Long term view: More room for growth with the Company plan to double their capacity in 2 to 3 years’ time.
Overview of Mtag Berhad Business
What’s our first impression when they visit Mtag Berhad (“Company” or “the Company”) website? The first impression that most people will get is that they are selling “sticker”, which would be wrongly classified, as it will be better known as adhesive tapes. That’s not entire accurate as well, as their main business is focused on filter mesh instead of adhesive tapes. Disagree? Take a look at their annual report and we can observe that more than 50% of their revenue derived from the filter mesh, as portrayed in the below image.
The Company main principle activities can be summarized as below:
- Adhesive Tapes and Paper – Adhesive tapes are basically used for bonding, shielding, masking, protecting and insulating. There are different types of adhesive tapes such as double-sided tape, heat sensitive tape (a specialized tape can withstand any heat) and static control tapes. The tapes are mainly supply to the customer in Electrical & Electronic Industry. In terms of adhesive tapes, they are authorized distributors for:
- 3M’s industrial tapes and adhesive products in Malaysia; and
- Henkel’s adhesive products in Malaysia and Singapore.
- Mesh Filter – Mesh is a type of wire or threads used for filter, protection and support functions. The Company will use the mesh material and convert it to a filter product which mainly installed in air filters of domestic appliances for filtration and protection purposes. The Company will purchase different types of mesh materials which come in jumbo rolls from approved suppliers and then converts the mesh into predefined shapes and sizes according to its key indirect customer’s needs and requirements. The converted mesh will be supplied to its direct customer which then performs “over molding” to turn this into a post-filter component of its indirect key customer’s household appliances.
Mtag major customer and suppliers
The company has long lasting relationship with their key 5 major suppliers and this has kind of reduce the downside risk whereby the reliance on a single supplier. On top of that, their major customers for the Company are as follows:
Wondering who Jabco Filter System Sdn. Bhd is? Which is contributing more than 60% of their revenue.
Yes, ATA IMS. For those investors who did their study would expect the Company to be doing well moving forward as ATA IMS posted a historical high revenue and profit in their recent quarter results.
Based on our further study, all their major customers listed above are the suppliers for Dyson except for Technocom System Sdn Bhd. On top of that, the second major customer is SKP Resource Berhad as well, which we can witness the recent spike in their sales and profit due to growing demand household products. Refer to our recent post on what we think of SKP Resource Berhad Results : https://jawplace.com/quarterly-report-review-8-skp-resource-berhad-a-new-phase-of-growth/
The risk of indirectly supplying to Dyson is that, if their customer cease supply to Dyson, the customer may in turn cease to use their converting services.
Recent Quarterly Results
The Company recorded a revenue of RM55.26 million for the current quarter as compared with RM49.08 million for the preceding period an increase of RM6.18 million or 12.6%. The gross margin remains at 29% to 30% range. However, there is a significant drop in their administrative expenses by 48%. This could indicate that the company could have measures in place to reduce costs during uncertain times to improve the company's bottom line. The beauty about the Company they are running a very high margin business due to their specialisation (in terms of customisation of their converting business) which can demand a higher value. Based on the current quarter results, even during pandemic phase (in which most company's margin will get eroded due to higher cost) the were able to achieve a 19.53% profit margin.
Based on our research, back in 2012/2013, the Company has invested in Ultrasonic technology, which utilises high frequency to execute slitting and welding of base materials. With the help of high frequency, slitting of base materials can be executed precisely without damaging the edges of the materials and hence, this could improve efficiency and reduces wastage and time in turn increase the company's profit margin.
The main bulk of the group revenue is derived locally, hence they are not exposed to foreign currency risk. Based on the company balance, they are trading on a net cash of RM104 million or 0.15 cents per share. Notwithstanding, due to the surge in their revenue, the company saw a huge increase in the account receivables increasing from RM39 million to RM63 million. As always, this could be alarming should the amount continue to increase, when the revenue starts to decline or remains.
The company went for IPO last year (2019) and they have successfully raised RM72.3 million in which they have plans to fuel their expansion blueprint. According to the prospectus and annual report, they are running at almost full capacity based on their existing facilities and hence they have allocated RM33 million or 45% of the IPO proceeds to acquire a 10 acre of land to construct their new plant. The positive note on this is that, with RM140 million cash, even with the RM33 million expansion plan, the company will still have a net cash of RM100 million which would give them ample of space to expand in the future.
The construction shall be carried out in two phases. The first phase will comprise a built-up area of about 200,000 square feet (“sf”). How big is 200,000 square feet? Just as a comparison, their current facilities have a built-up area of 83,500 sf. Notwithstanding, on top of the plan capacity expansion RM13.0 million or 18.0% of IPO proceeds has been earmarked for capital expenditure involving the purchase of 11 new machineries. Upon commissioning all new machineries, the Company annual production capacity of labels and stickers will close to double the current capacity.
Management CommentaryQ1 Results, FY 2021
The Company Management expects the situation to remain challenging for the remaining year of 2020 depending on the scale and length of the Covid-19 pandemic. Despite all uncertainties arising from the current Covid-19 pandemic, the Group is confident that it will continue to be profitable.
- A good and profitable quarter results as it could surprise some investors if they are not aware that their main customers are related to our local EMS players. However, given that the government impose MCO back in March and April 2020, the recent spike in more EMS players can be due to back log order. On the other hand, to some, the result is superb but not surprising given. That being said, the share price has been consolidating at a range between 70 to 80 cents in which we could see potential increase in their share price tomorrow.
- Short term perspective: We could see further upside in their earning and assuming stagnant earnings, with a PE of 14 (given their peers are trading at a higher range), the intrinsic value of the share could be RM0.86 cents which is trading at only 11% discount.
- A longer-term perspective (Will be impressive and exciting journey): Given that the company plan to double their capacity (Doubling the capacity could be an understatement due to higher floor space and more machineries allocated to their existing facilities as well), we could see their earnings to increase more than 50% if the capacity expansion materialize. However, this will not materialize in next 1/2 years and investors that have the vision and believe in the growth story of the company could put the company in the watch list (or allocate a small amount) to monitor the company expansion plan. Once the expansion plan completed, the share price could demand a higher value of perhaps above RM 1.00.
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